Companies in the US might have more cash than ever, but shareholders — activists and pension funds alike — remain smart at persuading firms to pay out surplus money through stock buy-backs and dividends.
On the one hand, non-financial firms held a record $1.64 trillion (£990 billion) in cash at the end of 2013, according to Moody’s Investors Service. On the other hand, the companies that make up the S&P 500 index bought back $475.6 billion of shares last year — a 19% jump on 2012.
What’s more, US companies paid roughly $302 billion in dividends last year, up more than 50 per cent from $197 billion in 2010. That’s at least $777 billion paid to shareholders in buybacks and dividends in 2013 alone.
Wall Street analysts expect an ongoing fight by shareholders to continue getting their hands on companies’ surplus cash. Unless firms can demonstrate they are putting the money to good use, investors — especially the growing number of activist shareholders — will keep demanding that they pay out big chunks.
Activists used to be viewed as carpetbaggers and opportunists, but even Wall Street enforcer, the chairman of the US Securities and Exchange Commission, Mary Jo White, believes there is growing acceptance of the activists’ aims. “It was not long ago that the ‘activist’ moniker had a distinctly negative connotation,” she said recently. “It was a term equated with the generally frowned-upon practice of taking an ownership position to influence a company for short-term gain.
“But that view of shareholder activists, which has its roots in the raiders of the Eighties takeover battles, is not necessarily the current view and it is certainly not the only view. The nature of the practices and objectives associated with shareholder engagement is changing.
“More and more, investors have become comfortable with being called an ‘activist’ in part because of the support they have received for their goals and, in some cases, even the tactics that they use. Here is widespread acceptance of many of the policy changes that so-called ‘activists’ are seeking to effect.”
Activists bring shareholders’ interests to the fore. Would Apple really have bought back $40 billion of stock over 12 months had Carl Icahn, the most famous of activist investors, not bought a stake and put public pressure on the company to return some of its cash pile?
Would Sotheby’s have announced in January that it would return $450 million to investors through a special dividend and a share buyback if Daniel Loeb’s Third Point and Richard McGuire’s Marcato Capital Management had not bought big stakes in the company to push for change?
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To be fair, many companies have not required the attention of activist shareholders to give money back to shareholders. The quieter demands of pension funds have been enough. As they seek regular income for their clients, dividends have made a huge comeback in the US and globally.
Last year the world’s publicly traded companies paid $1 trillion in annual dividends for the first time — 37% of that came from North American firms. In a low interest rate world where so-called “fixed-income” investments such as government bonds sometimes don’t pay much, dividends have become golden — and pension funds have become better at “encouraging” companies to pay them. But what about the companies that hoard too much of their cash? Will they be targeted by the activists? “Among sectors, technology continues to hold the most cash and has extended its lead,” said Richard Lane, senior vice-president at Moody’s.
At the end of last year 39% — or $638 billion — of total corporate cash was held by the technology sector (healthcare/pharmaceuticals, consumer products and energy followed). Apple, Microsoft, Google, Verizon and Pfizer were the five companies with the most cash, holding a collective $404 billion at the end of last year.
Also according to Moody’s, 220 companies were targeted by activist hedge funds or investment advisers last year — that’s up from 209 in 2012 and 179 in 2011. Not surprisingly, with so much cash on hand, the technology sector continues to experience the most shareholder activism, accounting for a quarter of all 2013 activist campaigns. And it looks like there will be no let-up any time soon.
“With their large cash balances, minimal debt levels and small, if any, dividend payments,” said Chris Plath, Moody’s analyst, “technology companies will continue to be targeted by activist investors calling for more aggressive capital returns”.
