Friday, November 2, 2012

Corporations Continue To Stockpile Cash

source: The Economist
According to Merrill Lynch, European stocks are trading at historically cheap levels:  11x  P/E, with a dividend yield of 3.9%.

Only stocks in the "BRICs"(Brazil, Russia, India and China) trade at cheaper levels.

By comparison, the U.S. market is trading a 13x P/E, and a dividend yield of 2.2%.

In other words, despite a +20% rally since June 1, stocks in Europe continued to trade at depressed valuations, reflecting the continent's somber mood.

When stocks are trading at such low levels, and if corporations have sufficient cash, you would expect a wave of corporate stock repurchase programs. Share buybacks are a way for companies to return cash to investors without having to increase dividends.  In addition, share buybacks boost a company's earning per share during times when other projects may not offer much appeal.

But according to the Financial Times this morning, European managements would rather stockpile cash reserves earning little or no interest rather than try to boost the share price of their companies.

Here's what the FT wrote:

The total amount of announced buybacks across Europe in the 12 months to the end of October stood at $590m, compared to $2.8bn this time last year, Thomson Reuters data showed.  This is close to 2009 lows of about $400m and pales in comparison to pre-crisis peaks of $3.8bn. At the end of the second quarter earnings season, the total for the preceding 12 months was just over $800m.

According to the latest issue of the Economist, European companies are not alone in their caution. Across the globe, corporations are sitting on huge stock piles of cash, preferring to err on the side of caution rather than be caught short as many were in the 2008-09 credit crunch.

Here's what the Economist writes:

Japanese companies’ liquid assets have soared by around 75% since 2007, to $2.8 trillion, according to ISI Group, a broker. Cash stockpiles have continued to grow in Britain and Canada, too, to the immense frustration of policymakers there. “Dead money” is how Mark Carney, the Bank of Canada’s governor, has described the nearly $300 billion in cash Canadian companies now hold, 25% more than in 2008. Mr Carney admonished them to “put money to work and if they can’t think of what to do with it, they should give it back to their shareholders.”|a

Unlocking at some of these worldwide cash hoards could potentially lead to a significant boost in global economic growth, and more stock market gains.

But the prevailing depressed mood among global CEOs makes that unlikely to occur any time soon.