The stockpile of cash on U.S. corporations’ balance sheets is a source of frustration for income-oriented investors who’d love to see fatter yields.
Crunch the numbers, as the folks at Capital Economics have, and you might find another aggrieved party: Anyone seeking a stronger U.S. economic rebound.
Capital Economics’ Paul Ashworth notes corporations’ $2.23 trillion of liquid assets — cash and short-term investments — on year-end balance sheets is equivalent to 19 per cent of U.S. disposable income. (The number excludes liquid assets for financial companies.)
In his recent report, titled “Could a surge in dividends boost the economy?” (only available to clients), Mr. Ashworth notes that even if firms only paid out 10 per cent of their liquid assets, “that would be enough to boost annual disposable income by almost 2 per cent and, even if a lot of that extra income was initially saved, it would probably still boost annual consumption by 1 per cent.”
Mr. Ashworth was spurred to examine the question by the recent news of Apple Inc.’s new dividend of roughly $10-billion a year and speculation, he says, that other companies might follow suit.
Certainly, U.S. firms have the capability to do so. Mr. Ashworth says companies’ cash reserves have risen from $42-billion at the end of the recession in mid-2009 to $672-billion at the end of 2011. Liquid assets (including short-term investments) increased from $1.45-trillion to $2.23-trillion.
As a share of all non-financial corporate assets, cash is at a 40-year high of 2.2 per cent, while liquid assets are at a near 50-year high of 7.5 per cent, he says.
The cash cushion seems to have come not from dividend stinginess, but from a lack of investment, however: Mr. Ashworth reports fourth-quarter dividends paid of $834-billion (annualized), was equivalent to just over 40 per cent of pre-tax profits, “which looks to be broadly in line with the average for the past 15 years.” (Dividend payments ranged between 20 per cent and 30 per cent of pre-tax profits during the 1970s before rising, according to Mr. Ashworth’s numbers from Thomson Datastream.)
Mr. Ashworth argues companies should consider dividends to make their shares more appealing in a climate of exceptionally low Treasury yields, and should give particular thought to large one-time payments this year, before the Bush tax cuts expire and dividend income gets taxed at higher rates.
Still, while U.S. have the resources to fund “a very big increase in dividend payments,” they might not, Mr. Ashworth says: “In many ways, an increase in dividend payments would be a negative development because it is tacit admission that firms couldn't find anything profitable to do with the funds. Nevertheless, as far as overall economic activity is concerned, if firms aren't going to spend the funds then the next best alternative is that they give the funds to their shareholders who will probably be more likely to spend the money.”