U.S. executives are starting to spend the record $940 billion in cash they built up after the credit crisis, just in time for annual shareholder meetings.
Takeovers topped $257 billion this quarter, the most since the collapse of Lehman Brothers Holdings Inc. in September 2008, according to data compiled by Bloomberg. Standard & Poor's 500 index companies authorized 38 percent more buybacks in 2011 than a year earlier and dividends may increase to a record $31.07 a share in 2013, data compiled by Birinyi Associates Inc. and Bloomberg show.
Chief executives are looking for ways to increase investor returns after posting the biggest gain in profits since 1988 by relying on near-zero Federal Reserve interest rates and cost cuts that have kept the unemployment rate near a 26-year high. About 140 companies in the U.S. equity benchmark index will hold shareholder meetings in the next two months after the S&P 500 almost doubled in the past two years and as profits approach a record.
"Shareholders have raised the bar," said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Va., which oversees $45 billion. "Companies are going to have to find ways to generate more return. The idea of sitting on idle cash in a zero interest rate environment is increasingly viewed as a nonviable option."
More takeovers were announced last week than any time since March 2010 after AT&T offered $39 billion for Deutsche Telekom's U.S. wireless unit and San Francisco-based Charles Schwab agreed to buy OptionsXpress Holdings of Chicago for $1.11 billion in stock. Cisco Systems, the world's largest maker of networking equipment, said on March 18 that it will pay a quarterly dividend for the first time, 6 cents.
The money is piling up
Companies in the S&P 500 have been piling up money for two years as per-share profit jumped 36 percent in 2010, the most in more than two decades, data compiled by Bloomberg show. The world's largest economy is forecast to expand 3.1 percent this year, the fastest annual pace since 2005, based on the median estimate from 68 economists surveyed by Bloomberg.
The rate of economic growth in the fourth quarter was revised to 3.1 percent from 2.8 percent and consumer sentiment dropped more than forecast in March, according to reports released last Friday. The U.S. unemployment rate is expected to remain at 8.9 percent this month.
Companies including Limited Brands, owner of the Victoria's Secret chain, are relying on debt to reward shareholders. The drop in borrowing costs to a three-year low has given executives the incentive to sell bonds and use the proceeds to repurchase stock and pay dividends.
At least nine borrowers had their credit ratings cut this quarter because they favored shareholders over bondholders, the most since the fourth quarter of 2007, according to Moody's Corp. S&P reduced its outlook for Limited Brands to "negative" after the Columbus, Ohio-based company sold $1 billion of bonds last week to help fund its stock buyback.
"You've got to be careful going down that road," said Brian Barish, president of Cambiar Investors. "Companies can do some long-term damage to themselves by levering up to buy back stock just because they're bullish on their stock when the market isn't. Sometimes the market has it right and companies have it wrong."
