With all the cash sloshing around, and the huge cash balances swelling at big U.S. corporations, the solution to economic mediocrity is clear: get corporations to spend on new business operations.
But so far, this has proven to be very difficult. It’s just so much easier for corporations to buy back more shares and increase dividends. Investors win near-term, but longer-term, the economy loses.
And this is already noticeable in this quarter’s flat earnings reports. The numbers have been trickling in, but cash and cash equivalents are still going up. Dividends are also going up on flat numbers to keep shareholders happy.
Arguably, many large U.S. corporations are in excellent financial shape. Balance sheets have never been better for all kinds of companies.
Even General Mills, Inc. (GIS), which just reported earnings results that basically met expectations, has seen huge cash gains. The company’s cash and cash equivalents position jumped to $741.4 million, way up from $471.2 million comparatively. That’s a surprising jump for such a mature, predictable business.
And the company said that it plans to reduce its average net diluted shares outstanding this fiscal year by two percent.
The unwillingness of corporations to make new investments is holding back U.S. gross domestic product (GDP) growth.
According to Forbes, 2012 saw U.S. non-financial companies grow their cash balances by an additional $130 billion, bringing total corporate cash positions to a record $1.45 trillion.
Of this cash, approximately 58% is being kept overseas.
The technology sector is obviously the leading hoarder, followed by the healthcare/pharma sector, then consumer products companies. Not surprisingly, there have been a lot of increased quarterly dividends from companies in these sectors.
I’m a believer in raising dividends and dividend reinvestment for investment success. Rising cash balances, therefore, increase the probability of increased dividends this earnings season. (See “Equity Market Super Stock Adding Up to Solid Returns.”)
But the financial wealth is, in a sense, a Wall Street success, not Main Street. The two can’t diverge perpetually.
It’s been a good three years for dividends as corporations have returned increasing amounts of excess cash. In order for corporations to be enticed to invest and repatriate cash from abroad, a major overhaul of U.S. tax policy will be required—and that is a very tall order.
So practically, it’s likely that the status quo will continue to prevail. Mediocre earnings results should continue to be peppered with increasing dividends and more share buybacks.
Even though capital markets are bouncing all over the place, with this fundamental backdrop from corporations, blue chips that pay dividends continue to offer the best risk-adjusted returns.