Bloomberg News

Cash Punished as S&P 500 Spenders Beat Savers Amid Buybacks

December 28, 2011

(Updates today’s trading in fifth paragraph.)

Dec. 19 (Bloomberg) -- In a year when American companies piled up record amounts of cash, the worst stocks were the savers and the best gave the money back to investors with dividends and buybacks.

Companies that hoarded cash such as CareFusion Corp., Western Digital Corp. and 18 other members of the Standard & Poor’s 500 Index lost an average 15 percent in 2011, according to data compiled by Bloomberg. The 40 that repurchased the most stock or offered the biggest dividends climbed 5.7 percent, led by DirecTV and Reynolds American Inc., the data show.

Bulls say gains in companies that returned money will help unlock almost $1 trillion of cash that chief executive officers have been hoarding for three years. Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase & Co., says distributions should increase 28 percent to $1.1 trillion into next year. Bears say dividends and buybacks will be insufficient to keep the rally going as mandated budget cuts curb growth.

“Investors are more yield-hungry than ever before,” said Jacob de Tusch-Lec, a London-based money manager at Artemis Investment Management LLP in London, which oversees $17 billion. “Because of the market we are in, investors have flocked to companies that are the best in the world at what they do, generate excess cash and have a proven record of returning money.”

Default Concern

The S&P 500 fell 2.8 percent to 1,219.66 last week, the first decline since November. Concern that countries in Europe face defaults pushed the index down 11 percent since it reached an almost three-year high of 1,363.61 on April 29. While the index has lost 3 percent for 2011, it has swung from an 8.4 percent gain in April to a 13 percent loss in October. The S&P 500 slumped 1.2 percent oday.

Companies built reserves as stocks sank and forecasts for growth in U.S. gross domestic product next year slipped from 3.3 percent in February to as low as 2 percent in October. Cash at companies excluding banks, utilities, truckers and automakers rose to a record $998.9 billion last quarter, according to S&P.

Hoarding money hasn’t paid off in the market. A group of 20 companies that increased cash and short-term investments the most in 2010 lost 15 percent this year, according to data compiled by Bloomberg. The data excludes companies that increased buybacks or dividends in 2011 or spent the most on capital investments last year.

CareFusion Cash

CareFusion boosted cash to the highest level since it was spun off in 2009 and Western Digital’s climbed for the past five quarters, data compiled by Bloomberg show. CareFusion, a medical supply company, hasn’t bought back shares or paid a dividend to public shareholders, and hasn’t announced plans to do so this year, according to data compiled by Bloomberg. The stock has fallen 6.4 percent since Dec. 31.

Western Digital, a maker of disk drives and networking products, beat profit estimates for the past two quarters and raised its quarterly revenue forecast this month. The shares, which trade at a 32 percent discount to their average price- earnings ratio in the last 10 years, declined 8.7 percent this year. MetroPCS Communications Inc., down 34 percent in 2011, raised cash to a record level in the second quarter.

At the same time, the 20 nonfinancial S&P 500 companies that spent the most to repurchase shares last year advanced 6.3 percent. Those that had the biggest dividend increases relative to their operating cash level rose 5.1 percent, according to data compiled by Bloomberg. There are 312 nonfinancial companies in the S&P 500 that pay dividends, and all but six raised or maintained them in the past year, according to data compiled by Bloomberg.

DirecTV, Reynolds

DirecTV, the largest U.S. satellite-television provider, bought back $1.45 billion of shares in the third quarter, part of a $6 billion program announced in February. Reynolds boosted its quarterly dividend payout twice in 2011. The companies rallied 5.4 percent and 25 percent, respectively.

The S&P 500 is trading at 12.3 times estimated 2011 earnings, or 30 percent below its 10-year average price-earnings ratio, data compiled by Bloomberg show. More than 1,000 U.S. companies authorized buybacks this year, according to Birinyi Associates Inc. At $520 billion announced through last week, 2011 is on track for the third-biggest year for repurchases on record, the data show.

“Companies that are just building cash, they’re looked at as not taking any risk,” Eric Green, a Philadelphia-based fund manager at Penn Capital Management, which oversees about $6 billion, said in a telephone interview Dec. 15. “If they’re not going to expand, they might as well be paying it out.”

Debt Crisis

Speculation Europe’s debt crisis will spur a recession sent investors to the relative safety of fixed income in 2011. U.S. Treasuries advanced 9.9 percent and investment-grade bonds returned 7.3 percent, according to Bank of America Merrill Lynch data. Unemployment that reached 23 percent in Spain and a budget deficit in Greece totaling 1.4 times gross domestic product heightened concern the region’s economy will contract.

The Dow Jones Industrial Average swung between gains and losses of more than 400 points over four days in August after Congress and President Barack Obama battled over borrowing limits that prompted S&P to downgrade the government’s AAA credit rating for the first time. The Chicago Board Options Exchange Volatility Index stayed above 30 between August and September as consumer confidence fell to a two-year low and U.S. unemployment was at or above 9 percent for seven months.

Manufacturing, Unemployment

While bonds climbed, equity investors snapped up companies returning money to shareholders amid signs the worst is over for the U.S. economy. Manufacturing in the Philadelphia region expanded in December at the fastest rate in eight months after plunging to a 29-month low in August, the Federal Reserve said Dec. 15. First-time claims for unemployment insurance slipped to the lowest level since 2008, the height of the worst recession since the 1930s, the Labor Department said Dec. 15.

Another contraction may send investors back to companies that have piled up cash, according to Federated Investors Inc.’s Lawrence Creatura. While U.S. jobless claims fell to a three- year low last week, concern European leaders are failing to stem the two-year debt crisis sent the euro to the biggest weekly decline since September.

“The question investors have to ask themselves is, what will be the state of the global economy next year?” Creatura, a Rochester, New York-based fund manager at Federated Investors, which oversees $350 billion, said in a Dec. 15 telephone interview. “That will define which companies you should own.”

Earnings Beat Projections

Buybacks and dividends aren’t keeping up with profits compared with 2007 distributions and should increase by about $250 billion into next year, according to Lee at JPMorgan. S&P 500 earnings have beat analyst projections for an 11th straight quarter and are projected to end 2011 at $98.89 a share, about 18 percent higher than in 2007, the last year before the financial crisis. according to analyst forecasts compiled by Bloomberg.

“Corporate cash return is not anywhere close to prior highs,” he said. “The implication is that corporates are likely to vastly ramp up cash return.”

The world’s largest economy shrank 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the most of any recession since the 1930s. General Electric Co., once the biggest company by market value, shocked investors on Feb. 27, 2009, by cutting its payout for the first time since 1938 after its shares plunged 78 percent in less than 17 months.

GE Dividend

GE, now the ninth-largest U.S. company, raised its quarterly dividend 13 percent on Dec. 9, the fourth increase in less than two years. The stock gained 3.3 percent since Chief Executive Officer Jeffrey Immelt told shareholders Dec. 13 that the company should generate $30 billion in cash to spend on acquisitions, payouts and buybacks over the next three years.

“Companies are looking at their uses of what are pretty hefty cash reserves, and they’re voting with their checkbooks that they think their shares are undervalued,” said Tom Murphy, a money manager at Columbia Management in Minneapolis, who oversees $23 billion of investment-grade credit. “They’re saying that’s the best opportunity they have.”

--With assistance from Sapna Maheshwari in New York and Alexis Xydias in London. Editors: Chris Nagi, Nick Baker.

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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