Thursday, February 10, 2011

The Corporate Cash Logjam May Begin To Flow

For the past several years we have heard about the huge cache of corporate cash that has piled up on large companies' balance sheets. Both political pundits and financial reporters have chronicled the fact that, for various reasons, big companies were hoarding, not spending cash. The implication was clear:when the spending starts the economy will strengthen, jobs will be created, the market will rally, and all will be well with the world.

Recent days have produced two clear signals that the logjam may start flowing. First, Obama chastised the Chamber of Commerce audience to start investing that cache of corporate cash in American projects and creating American jobs. The implied threat is that Obama will be watching and corporate cash totals shouldn't continue to grow while the American economy and unemployed workers are under stress. Implied threat or not, creating jobs for Obama's sake may not be in the best interest of corporations unless they make financial sense. What is in the best interest of America's corporations is to not incur the wrath of the Government.

Yesterday Dow Chemical announced, in my opinion, their version of how can we best reduce our cash totals prudently. After deciding that they had enough cash to fund all viable business expansions, they raised their quarterly dividend by 5 percent and approved a new $7B stock buyback in addition to the $2.5B still authorized. Over the next several years they are going to return lots of money to shareholders. If they saw 10B of projects that would hit their IRR hurdles, they'd invest in those money making projects. I read DOW's decision as disciplined management that isn't going to be pushed into reckless spending just to please the President. But, they aren't going to be caught in the spotlight either with lots of cash and facing potential regulatory repercussions.

While I believe we will see many more dividend increases and stock buyback authorizations, corporate cash is going to be increasingly put to use in strategic Mergers & Acquisitions. All three actions will be beneficial to the stock market as money will be flowing. The impact on the national economy and the unemployment rate may not be dramatic, but it will raise the major stock averages this year.

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