Near-60 year highs of cash on company balance sheets will lead to share buybacks, dividends and a rise in takeover activity, according to Brian O’Neill, the manager of the Gartmore Global Trust.
O’Neill says all of these would be supportive of higher share prices or at least help put a floor under the market.
According to data from the US Federal Reserve, non-financial S&P 500 companies have more cash on their balance sheets than at any point in the past 58 years.
In the year to end March, American companies increased their liquid assets by 26% to $1.84 trillion, the highest level since records began in 1952.
In addition, data from the Bank of Japan reveals that Japanese companies have also accumulated a record amount of cash.
O’Neill says a similar situation exists in Europe, where companies’ preference for cash parallels trends in America and Japan. (article continues below)
“One option typically open to companies is to use the cash to finance capital expenditure, but evidence suggests this would not currently be well received by investors,” he adds.
“With many companies operating at below full capacity—thanks to technological improvements and employee productivity gains—the market has been punishing companies that plan to expand organically, while rewarding those that keep capacity in check.”
Examples of recently announced share buybacks include: Viacom, GE, Fidelity National Information Services, Hasbro and Intuit.
“The cash belongs to shareholders and with interest rates at historic lows, they will not put up with companies hoarding cash for too long,” adds O’Neill.
“In this volatile and unusually uncertain environment, returning capital to shareholders is a sensible use of surplus cash.”