One of the symptoms of uncertainty that is pervasive in the economy right now is the large amount of cash that is sitting on companies' balances sheets. According to FactSet, non-financial companies in the Standard & Poor's 500-stock index are sitting on a record $2 trillion. The question arises: What will these companies do with all that money?
Along with strong profits, corporations are finding markets very receptive to high yield bond issuance as well. Two weeks ago, the high yield market had its largest week of issuance ever with $15.4 billion in deals. This has further fueled the amounts of cash on companies' balance sheets. Remember, this was a market virtually shut down during the European sovereign debt crisis.
When stock prices are weak and companies anticipate a turnaround, one of the areas they put money to work is taking over their rivals or expanding their product lines. We've seen a spate of takeover news from BFP-Potash, Intel-McAfee, Miller-Fosters and Campbell-United Biscuits are all in the news. As a matter of fact, last week was the largest announced M&A week of the year with deal volumes running 20% ahead of 2009 according to the FT.
However, there is another use of this cash that is garnering investor interest. Stock repurchases and dividends are making a re-appearance on the investment scene. According to Thomson Reuters, the value of share 2010 repurchase programs has already more than tripled from 2009 to $142.7 billion. The WSJ reports that, "And one-third of S& P 500 companies increased their dividends this year, handing out an extra $12.7 billion after slashing them by $41 billion in the same period last year, according to S&P."
Here's an optimistic point from the WSJ article: "J.P. Morgan Chaseestimates that if cash balances among S&P 500 companies were to return to normalized levels-about 7% of assets from the current 11%-it would result in spending of $428 billion. That's almost as much money as companies poured into share repurchases for 2008 and 2009 combined."
All of this cash generation and stockpiling will eventually be put to use and the fall should be a banner time for deals. Unfortunately, it is reflective of the lack of confidence by US businesses that they are not hiring for expansion. The good news is that this is part of the economy's healing process and it will continue.
________________________
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.
