Is an avalanche of cash about to hit the stock market? Jonathan Golub, a strategist at UBS, thinks so -- and that's potentially good news for investors.
"Typically, cash continues to accumulate even after recessions end, only to be returned to shareholders once the recovery is healthily under way," he said in a note.
"While buyback and dividend increases have been large in dollar terms, the rise in total payout as a per cent of earnings has been comparatively modest. Put differently, we believe that we are in the early innings of a long process of repatriating cash to shareholders."
He noted that right now, U.S. companies are returning 59 per cent of their net income to shareholders, in the form of dividends and share buybacks. That's far below the peak of the last cycle, when the payout ratio was 94 per cent. It is unlikely that dividends are going to skyrocket, given that they tend to grow at a slower, steadier pace. That's why Mr. Golub expects that share buybacks will see the biggest gains.
In his note, he showed the results of a screen that looked for stocks that should benefit most from this trend of returning cash to shareholders. For large-cap stocks, he looked at companies that had a history of buybacks in 2010, along with strong near-term earnings growth (growth of 16 per cent or more) and a lot of cash (where cash holdings are at least 16 per cent of their assets). He used slightly different criteria for small-cap stocks.
Cyclical stocks, and technology stocks in particular, top the list. Some of the highlights include: Starbucks Corp. , Coach Inc. , Netflix Inc. , Hasbro Inc. , Google Inc. , Applied Materials Inc. and Juniper Networks Inc.