The 3 Billion Dollar Question

What are they going to do with all that cash?

Over the past 3 years, corporations have built up quite a nest egg. Over $3 trillion in cash sits on corporate balance sheets, the fruit of years of rising margins and a formerly booming economy. When the downturn came, corporations cut costs to protect themselves. Now they have a cash war-chest. What are they going to do with that money?

Conventional wisdom says that firms do share buybacks with one-time cash bonanzas, they expand their business when the margins improve, and they increase their dividends when sales grow. Since the economy is still in the doldrums, and margins seem to be falling back to earth, share buybacks seem to be in the offing. But is this smart?

Share buybacks are supposed to decrease the cost of capital by increasing the percentage of tax-deductible debt in the capital base. But we’ve learned the hard way in the past two years that increased leverage means increased risk. And shares bought back in a rising market can be reissued when cash is scarce and markets are low, destroying value.

So what should companies do when cashflow is strong but investment opportunities are few? Well wow about giving shareholders the cash? If the company can’t put it to work, shareholders can. Either that, or find new managers.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By |2014-09-05T19:48:49-04:00July 18th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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