A recent CNBC article notes the growing cash on corporate balance sheets (via the WSJ roughly $1T for S&P 500 companies) and outlines why the growing cash hasn’t translated into larger dividend payouts:
- Companies no longer wish to finance through short-term credit markets if they don’t have to.
- Americans are saving more and taking on less debt. This mutes future growth and consumption.
I will add one more reason:
3. Non-financial companies haven’t really deleveraged and liabilities are still near an all- time high.
And here is why those issues lead to lower dividend payouts:
- If we have another disruption in the credit markets the blow won’t be as hard to companies flush with cash.
- Heightened consumer saving and decreasing debt points to consumer uncertainty. This leads to an unclear business environment where cash can help ride out a fall in revenues.
- There are two-sides to the balance sheet equation. Companies increase their cash stake to pay down liabilities in the future.
Ultimately, the high cash levels are mildly bullish for the market in general. I doubt items 1 and 2 are changing anytime soon. That said, if they do change then companies with stockpiles of cash should be in good shape to issue dividends or deploy for investment.
It’s not bearish for the market because having cash is a good thing. Cash is king. If credit markets freeze or the economy stalls, companies with a lot of cash should be in better shape. Thus, investing in cash rich, financially strong companies should give you some cushion if the broader market moves down.
