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David Bianco is staging an intervention for chief financial officers.

Your addiction to hoarding isn't victimless. Your shareholders are suffering.

Merrill Lynch's chief U.S. equity strategist issued a report this week that, in part, scolded CFOs' bad management of cash - not that they have too little of it in the corporate coffers, but too much. Excluding the financial sector (which has had its own very good reason for increasing cash on its balance sheets), S&P 500 companies have a record $1.1-trillion (U.S.) - yes, with a "t" - of cash socked away, equal to roughly 11 per cent of their total market capitalization.

Mr. Bianco argued that all that cash hoarding is hurting share prices. Companies can afford to pay higher dividends, and investors are demanding them - and those tight-fisted dividend policies are paying for it in their share price.

Payout at historic lows

While the cash mountain has been growing, the ratio of dividend payouts to earnings is near historical lows. The S&P 500 average payout ratio is just 27 per cent - below the average over the past decade of 33 per cent, which in itself has been a particularly weak period for dividend payouts.

"[It's]inconsistent with a slower-growth economy with investors desperate for yield," Mr. Bianco wrote.

He said some financial executives have it in their heads that the market punishes companies with big dividends, taking them as a sign that a company has abandoned growth. That's outdated thinking, he said.

Get with the times

The numbers show that higher dividend payers are consistently rewarded with higher stock values. On average, Mr. Bianco said, even S&P 500 companies with moderate dividend payout ratios - in the 40- to 50-per-cent range - are commanding price-to-earnings valuations 11 per cent higher than those paying in the 25- to 35-per-cent range.

"We think few things shake investor confidence in growth like a single-digit P/E," he said.

He added that the best-performing investment strategy on the S&P 500 in the first half of this year has been stocks whose dividends are growing.

What's more, the superior P/Es for higher dividend payers are found across the breadth of the market - even in sectors where growth is traditionally at a premium. Among large-cap pharmaceutical stocks, for example, the top-quartile payout companies have an average P/E that's 4 per cent higher than the overall average for the sector. Among large-cap technology stocks, the top-quartile payouts have a P/E that's 17 per cent above the average of the peer group.

"This exercise makes it much more apparent that tech capital structures are out of sync with the times," he wrote.

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