As the global recession and financial crisis recede in the
rearview mirror, companies have been acting more proactively in
using their balance sheets in ways that enhance shareholder
value. But we think they can do a lot more.
As the market tumbled and liquidity dried up after 2008,
companies became very conservative, hunkering down and building
massive cash reserves on their balance sheets. By mid-2013,
U.S. companies were sitting on cash that was equivalent to
about 11 percent of their total assets (see chart below), a
three-decade high and earning almost nothing. Whats more,
a long decline in interest rates made borrowing much
When corporations dont put their healthy balance
sheets to work in productive ways, shareholders get
Thankfully, that trend has changed. With borrowing costs
still very low and business conditions stable to improved,
management teams have become more receptive to using debt to
buy back shares, increase dividends and make acquisitions.
Each of these actions can boost shareholder value. Share
buybacks shrink the total number of shares outstanding and give
a shot in the arm to earnings per share by helping them grow
more rapidly in the years ahead, all things being equal.
Dividend payments provide attractive income to investors, and
acquisitions if executed thoughtfully can create
new avenues for business growth.
It is getting more difficult to find companies that appear
content to ignore low interest rates and high cash balances.
But we still see some companies doing exactly that, even good
businesses that represent attractive investments. They can do
better for their shareholders.
Take Qualcomm. The telecommunications giant is a well-run
business, but managements strategy for returning capital
to shareholders has been underwhelming. The firm sits quietly
in San Diego and has a net cash balance equivalent to about $18
per share, with $6 per share of that held domestically
making it more accessible. Without borrowing a cent or
repatriating any offshore cash, Qualcomm could buy back 9
percent of its shares outstanding. By issuing relatively cheap
debt, it could have more cash on hand and accomplish the same
We believe that buying back shares would benefit both the
stock price and shareholder value. The company reported $1.5
billion in share repurchases for the second quarter. But since
these purchases were used to offset the exercise of company
stock options, the average number of shares outstanding
actually rose compared with the same quarter in 2012 and, for
that matter, the first quarter of 2013.
So, from the perspective of outside shareholders, no shares
were repurchased. Even as Qualcomms corporate earnings
exploded in recent years, its stock price languished. In fact,
its trading at a discount to the S&P 500 measured by
price-to-earnings despite strong growth forecasts.
Apple took a different route, but only after a lot of
convincing. It was a longtime holdout from buybacks, offering
similar justifications to those weve heard from Qualcomm
and other companies. These include the need for sufficient cash
reserves to make operational investments and acquisitions in a
rapidly evolving industry. We acknowledge the need for some
liquidity, but its telling to us that Apple eventually
relented and borrowed against its cash reserves to buy back a
substantial number of shares.
Other companies still resist share repurchases, even when
their stocks are undervalued and they have more than enough
cash to shrink bloated share bases. Qualcomms management
has raised its dividend in recent years, a modestly positive
step. But it hasnt reduced the share base and that
certainly doesnt help the company take advantage of its
stocks low P/E ratio.
In our view, truly shrinking a share base by buying back
shares is likely to lead to higher earnings per share. And
since corporate cash is earning less than the dividend yield on
the stock, repurchasing shares could actually save money.
Whether a company uses cash, relatively cheap debt issuance or
a combination of both to increase shareholder value, we think
investors would welcome the news.
Kurt Feuerman is chief investment officer of Select U.S.
Equity Portfolios at AllianceBernstein.
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