The U.S. economy is not going to grow in a sustainable manner unless corporations start investing in the Main Street economy. The problem is, large-cap companies are just as skittish about the economy as stock market investors. This is why we’re going to see increased dividends and a lot more share buybacks this year. Holding cash just doesn’t pay when interest rates are so artificially low. The stock market today needs share repurchases and more dividends. They are big contributors to investor sentiment.
Target Corporation (NYSE/TGT) is the latest big company to announce another major share repurchase program. The retail sector is improving, but this doesn’t mean that companies want to make any major new investments. In this environment, the safer play is to buy back your own shares on the stock market.
Target’s board of directors authorized a new $5.0-billion share repurchase program just as its previous $10.0-billion repurchase program winds down. According to the company, from November of 2007 until the third quarter of 2011, it repurchased more than 185 million shares at an average price of $51.53 per share (the current stock market price is around $50.00 per share). This represents about 22% of the company’s outstanding common shares during the period and the new $5.0-billion share buyback program will last the next two to three years.
Target also announced it would pay 2012 first-quarter dividends of $0.30 per common share, representing its 178th consecutive payment of dividends since October of 1967 when the company listed on the stock market.
Another big name retailer, Macy’s, Inc. (NYSE/M), recently boosted its quarterly outlook and doubled the amount of dividends it pays to shareholders. (See 2012: Already the Year of the Mighty Dividend.) The stock market rallied around Macy’s news and the shares are now trading right at their 52-week high of approximately $35.00 per share.
For investors and Wall Street, increased dividends and share repurchases are pure gravy. They generate more income, more fees and more commissions. It’s all so easy. The problem is that this doesn’t help the Main Street economy nearly as much as direct investment by corporations in new plants, equipment, employees, and training. The economy, in my view, won’t accelerate without this kind of spending by big companies and they won’t make new direct investments unless there is more certainty in the global marketplace.
So, I think it’s going to be a pretty decent year for stock market investors who are focused on companies that pay higher rates of dividends to shareholders. All that cash has to go somewhere, so it might as well go back to the owners. Shareholders don’t hire boards of directors who hire managers to watch over cash in the bank. This is especially true in the current interest rate environment, which doesn’t pay more than the rate of inflation.
Large-cap companies are poised to significantly increase their stock market repurchase programs and increase their dividends. It’s a good development for Wall Street and income investors in a slow growth economy. Corporations know that the stock market isn’t overpriced, so instead of risking the cash on new business investment, it’s much safer to just return more of it.