Tuesday, December 14, 2010

Imagine the vibrant economy where managers distributed their business earnings to shareholders

In good times and bad, income trusts were truly the way to organize a vibrant and efficient economy, Why else do you think that Corporate Canada wanted them killed? Since the whole issue was about who controls the excess cash.....the business owners or the business managers:

December 12, 2010
U.S. Companies' $1.93 Trillion Cash Hoard Biggest in 51 Years
By Don Miller, Associate Editor, Money Morning

U.S. corporations are piling up cash at the fastest rate in half a century. But instead of signaling a new wave of spending, that cash pile may mean tough times ahead.

Non-financial companies in the United States had stacked up $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the U.S. Federal Reserve said Thursday. Cash made up 7.4% of the companies' total assets -the largest chunk since 1959.

But capital spending and plans to hire new workers remain subdued, showing the deep concern companies harbor about a painfully slow economic recovery that has failed to put a dent in high unemployment and reignite consumer spending.

With interest rates at or near zero, companies holding huge amounts of cash are suffering from record low returns on their money.  But the huge cash hoard may indicate that managers don't see many opportunities to put their money to work without incurring huge risks.

"The corporate sector is looking at the household sector and saying, this is not the environment where we should expand our business economist Torsten Slok told The Wall Street Journal.

Companies have a number of options when cash becomes a big part of the balance sheet.  They can deploy excess cash to increase dividend payments, acquire other firms, buy back their own shares, reinvest in operations or simply retain the cash in the form of cash or short-term marketable securities.

"There is greater pressure on companies that are either not paying dividends now or are paying below-market yields," Brett Hryb, senior portfolio manager in U.S. equities at MFC Global Investment Management, told The Journal.

But dividend payouts in the United States are trailing many other developed markets, including the United Kingdom, Australia, New Zealand, France, Italy, and Spain. For example, Australia has a dividend yield of about 4% while the current dividend yield on the S&P 500 is about 2%.

In recent months, many companies including Nike Inc., Intel Corp., Baxter International Inc., United Parcel Service Inc., and Johnson Controls Inc. ), have announced dividend raises. But despite those increases, the total level of payouts from U.S. companies remains well under the levels from two years ago.

Among Standard  & Poor's 500 Index companies, 368 are now paying dividends, up from 363 in 2009 but below the 2008 tally of 372.

"It's been a great year, but we are still nowhere near where we were in 2008," Howard Silverblatt, senior index analyst at Standard & Poor's Indices, told The Journal.

But there is a silver lining.  Changes to dividends netted out to a $40.2 billion drop for shareholders in 2009, but companies added back $15.4 billion in payouts through the third quarter, Silverblatt said. 

Companies "are under increasing pressure to use their cash for mergers and acquisitions (M&A) and buybacks, with dividends now on the list," he said.

A flurry of mergers and acquisitions in late November raised hopes that activity would jump in 2011.

Indeed, thanks to low prices for takeover target companies, easier credit terms, and historically high cash balances, the atmosphere for deals in 2011 is as positive as it's been since the credit crisis sent the economy, and M&A activity, into a tailspin.

Global M&A activity is expected to increase 36% next year to $3.04 trillion , driven by a big pick-up in deals in the real estate and financial services industries, according to a report released Monday by Thomson Reuters and Freeman Consulting Services. 

But the survey of over 150 worldwide corporate decision makers also showed that next year's buyers are expected to focus on expanding their core businesses to increase market share.  That could lead to a wave of consolidation instead of a hiring binge.

Moreover, the surge in M&A will be focused in emerging markets, especially Asia, where the average cash balance of companies was almost double that of U.S. companies.

Buying back shares is another use for cash, but those programs are also controversial. 

Companies argue that buybacks reduce float, or the number of shares outstanding, especially when they consider shares to be cheap.  Usually when a buyback program is implemented, it gives a short-term pop to stock prices. But when that happens, executives rush to exercise their options and sell shares.

Also, some investors consider buybacks to be an indication that management is incompetent because they don't know how to grow the company by doing an M&A deal or investing in research and development.

Another objection to buybacks is that companies may overpay. From 1986 through 2002, the old General Motors Co. spent $20 billion on buybacks with money that should have gone to shoring up its finances, William Lazonick, director of the Center for Industrial Competitiveness at the University of Massachusetts Lowell , told Bloomberg News.

In the past decade, Microsoft Corp. has spent more than $103 billion on buybacks, yet its stock trades at about half its 2000 high.

"A lot of companies are just stupid about buybacks.  There should only be one reason you buy back shares: You think they're going up ." Daniel Niles, senior portfolio manager at asset management firm AlphaOne Capital Partners, told Bloomberg.

For the foreseeable future at least, cash looks like it will remain king in the boardrooms of corporate America.

Tax U.S. companies into spending
By Mihir A. Desai
Friday, December 10, 2010
The Washington Post

Recent tax deal-making has relied on conventional instruments of fiscal stimulus. Yet, we live in unconventional times, and more novel approaches suited to the peculiarities of our current economy are required. In particular, the remarkable cash hoards that American corporations have amassed have been a saving grace in ensuring that the financial crisis did not cause further damage to the economy. With traditional monetary and fiscal policy instruments seemingly exhausted, the mobilization of that cash hoard can prove critical to reviving the economy.

The historically exceptional cash holdings - estimates of the amount held by U.S. public corporations easily exceed $1 trillion; several technology companies alone are sitting on cash balances in excess of $20 billion - are thought to result from the absence of investment opportunities or from indecision among corporate executives. Once such indecision becomes widespread, it can quickly become self-reinforcing. Recent record corporate profits will only exacerbate this situation. If chief executives and chief financial officers are goaded into spending that cash, the economy could benefit from a significant stimulus that, unlike stimulus measures relating to government spending, would stem from decentralized actors responding to private information and incentives.

Consider the potential effects of a temporary 2 percent tax on corporations' "excess" cash holdings. With the returns on their cash holdings approximating zero, managers would have to explain to their investors why earning a negative 2 percent return would make sense as opposed to either investing or disgorging that cash to shareholders.

The definition of "excess cash holdings" will be critical. But such levels easily could be defined relative to industry benchmarks from periods that featured more standard corporate savings behavior. Alternatively, a measure of accumulated nondistributed earnings could also serve as the basis for the tax. Accumulated earnings taxes have been used in the past, although sparingly, with particular reference to individuals who incorporate for business purposes.

Implementing such a tax would require measures to prevent some unintended consequences. A large fraction of corporations' excess cash - as much as two-thirds, according to some estimates - is held outside of the United States to avoid the "repatriation taxes" that occur under the U.S. system of worldwide taxation. Simply put, multinational firms currently have an incentive to keep money abroad.

A temporary holiday of the repatriation tax coupled with the tax on excess cash holdings could help ensure that the disgorged cash would be used productively in the United States. A previous repatriation tax holiday in 2004 induced the return of more than $300 billion to this country, and commentators across the political spectrum, including Andy Stern, formerly of the Service Employees International Union, have already begun to call for another repatriation tax holiday.

Coupling these policies provides a carrot and stick for managers to begin to repatriate cash and use it productively at home. The combined revenue effects is likely to be relatively small, given how little revenue is currently collected on unrepatriated earnings and how sensitive corporations are likely to be to facing a negative rate of return on their cash holdings. But the goal would be more to trigger behavior that feeds that economy rather than raising revenue for the government.

Ideally, firms would invest their excess cash funds in new projects in the United States. President Obama's proposal to allow for immediate expensing of investments could help ensure that firms were tilted toward spending that excess cash on new projects within the United States. A reduction in the corporate tax rate that would bring the U.S. rate in line with worldwide norms would also help enormously in directing these cash hoards toward investment. But even cash disgorged through dividends, share repurchases or mergers would have a potentially stimulative effect compared with corporations banking the funds.

It is tempting to pin hopes of an economic recovery on a centralized effort or another significant program by the Federal Reserve. But a remarkably large pool of unmobilized capital is sitting within our firms and managers appear frozen in their decision-making. A gentle nudge to break this coordination failure - through the combination of the fiscal carrot and stick described above - could shake managers out of their indecision and provide a privately-directed, revenue-neutral stimulus that could eclipse the effects of any potential stimulus that could emerge from Washington today.

The writer is a professor of finance at Harvard Business School.


Dr Mike said...

They want one big juicy North American pie---our poor old trusts were nothing but an inconvenience standing in their way----accountability , who needs that.



Dr Mike Popovich

Anonymous said...

This is like cash constipation. Income Trusts were the laxative.

Anonymous said...

There is a finance-slash-economic myth that the shareholder is a nitwit: Don't pay the shareholder anything because he or she will do something stupid or useless with the money.

There's a related myth that the corporate manager's drawing board is always pregnant with more and bigger profits -- more so than the nursery of a fundamentalist religion in the backwood or backroom of somewhere. So true; the corporate guy is always screwing somebody.

But if the shareholder is smart enuff to invest in the corporation, maybe the shareholder is smart enuff to reinvest his or her dividends to get a higher return, eh?

Anonymous said...

I like Desai's suggestions. BB

Anonymous said...

A running economic engine requires money to circulate at a higher frequency not money unproductively hoarded in a corporate structure. The neocons are essentially hard at work channeling all the money into fat pig corporate account away from government coffers. How about channeling it through the fingers of everyone else.


Brent Fullard said...



It’s just like an efficient business can be determined by how many times it “turns” its inventory in a year, so too can the efficiency of an economy be determined by how many times it turns its cash over in a year. The more people who touch a given dollar in a year, is a good thing, as opposed to corporate CEOs that are hoarding cash and restricting its flow.

That’s my theory at least. I doubt whether there is any discipline that has looked into such a measure, but I am sure it would be insightful to learn more about its causes and effects of the "velocity" of capital.

Anonymous said...


I have seen synopses of papers regarding the "frequency" of currency in an economy. It's kind of like electricity in a power system or water in a hydro system. The more people who can tap into the system the healthier it is. Unfortunately, there are all these Ayn Rand types out there who feel they should have the individual freedom and right to secretly or covertly channel everything to them and away from everyone else, especially the financial illiterates, the naive and the elderly.

I'll try looking it up.


Anonymous said...

I think everyone who has taken the time (and Math) to look at this issue, has recognized the failure of the Conservative Government policy on Trusts. They failed to protect people on fixed incomes, failed to maintain marginal tax revenues and have supported no corporate accountability. In spite of many gaffs in policy, Harper continues to gain popularity? How can we accumulate the Harper gaffs and create a sound economic platform to elect an alternative?

Problems are easy...solutions not so much!!
However I know better than to believe you are ready to quit!


Anonymous said...

Another bothersome thing about this blog is that the Canadian financial press just doesn't print this type of story or opinion.

A journalist in Canada is a job ho.

All together now, let's a refrain of,

"Glory, glory how I'll sue you
Canadian newspapers are easy
Canadian journalists are sleazy
And Canadians are near queasy
Glory, glory how I'll sue you
I'll take your brains away