Why owning blue chips makes so much sense in a slow-growth environment: they have the cash and they are willing to spend it to keep shareholders happy—and that’s just one of the reasons.
Take Caterpillar Inc. (CAT), for example. This company is experiencing slow business conditions, because the mining industry is in its own recession.
The company can’t manufacture sales, but it can keep buying back its own shares. Management allocated $1.7 billion for share repurchases in this quarter alone. Last year, the company spent a total of $2.0 billion buying its own shares.
Caterpillar’s recent financial results surprised Wall Street. Even though sales were down comparatively, 2013 fourth-quarter revenues beat consensus by $1.0 billion and consensus earnings by $0.26 per share.
Caterpillar is a global benchmark and an enterprise worth following. The company offers a lot of industry and global economic information to investors. (See “A Must-Read for Long-Term Equity Investors.”)
Big corporations have the cash, and while capital expenditures on plant, equipment, and employees are restrained, shareholders are the beneficiaries of such strong balance sheets.
United Technologies Corporation (UTX) reported fourth-quarter revenues below Wall Street consensus, but earnings were better than expected. The company plans to buy back $1.0 billion of its own shares this year after spending $1.2 billion in 2013.
Share repurchases help shareholders and corporate executives on a short-term basis, but if there is a drawback to them, it’s the opportunity cost of new business investment; excess cash could be invested in new research and development, expansion, acquisition, and innovation. A company that chooses to buy back its own shares is one that’s seemingly content with the status quo.
This coming Thursday, 3M Company (MMM) announces its 2013 fourth-quarter financial results. Around this time last year, the company authorized share repurchases of up to $7.5 billion. In the first nine months of last year, it spent $3.538 billion buying back its own stock, up from $1.49 billion in the first nine months of 2012.
Even though 3M authorized a $7.0-billion share repurchase program from 2007 to 2009, it didn’t effect any share repurchases in 2009, which in hindsight, would have been a much more opportune pricing. It had plenty of cash on its books to do so.
So far this earnings season, balance sheets are, once again, holding up strong and more dividends and share repurchases are likely in the bottom half of the year.
eBay Inc. (EBAY) bought back $254 million of its own common shares in the fourth quarter of 2013. Earlier this month, the company authorized another $5.0-billion share repurchase program.
As is commonplace, corporations are keeping their outlooks subdued in order to make it easier to outperform Wall Street consensus.
While the market trades off earnings news, balance sheets shouldn’t be ignored. Dividend-paying blue chips are still the stocks to own.