The spectacular levels of cash on the average large corporation’s balance sheet is looking for a home. With cash and liquid assets at 7.4% at the start of the year, this was the highest proportion of corporations’ total assets since the 1950s, according to the Federal Reserve Bank of Cleveland.
The cash pile might also be further boosted by the super-low yields on investment-grade debt. The Financial Times said at the weekend that the US yields – the rates borrowers have to pay for the debt – are back to 5.36%, levels last seen in April 1966. The news provider convincingly argues the leverage, if taken on, could go on share buybacks and corporate takeovers to boost shareholder returns.
The macro-economic news, however, is gloomy in developed economies and chief executives there likely to want to maintain a conservative financial position and cash buffers to protect against a sudden lurch down. But on the side encouraging more efficient financial structures are the leveraged buyout firms and investment bankers where low relative and absolute yields offer opportunities for transactions. There is no surprise at this point in the economic cycle to see a number of large private equity firms trying to buy everything they can.
Also encouraging a corporate leveraging are governments and societies that need to find ways to boost consumption in order to fuel growth, even if it is another shorter-term fix. Investment grade companies are the only ones left able to borrow more to spend. That the vast majority of takeovers fail to achieve their objectives and share buybacks have a natural limit when there is no more equity in public issuance has yet to stop the argument so far.
Sadly, it appears unlikely shareholders will argue companies will be able themselves to use the cash and potential leverage to find more innovative ways to deliver a net return of more 5.4% over a longer period than this year’s earnings per shares analysis boosted by a buyout or buy-back, or a dividend increase. (In the second quarter 444 US companies increased their dividends by an aggregate $11.2bn while 21 cut theirs’, according to a nice piece by news provider Seeking Alpha.)
There are more positive examples out there, but often away from the public stockmarkets. Wellcome Trust and Harvard University have been among a number of highly-rated institutions to have issued bonds to fund longer-term plans and, unsurprisingly, part of this is investing in venture capital (directly or through third-parties).
Finding longer-term growth is relatively straightforward: a diversified portfolio of equities on assets growing cash and profits over a longer-term faster than other peers. These assets are, unsurprisingly, found in markets with relatively high gross domestic product growth, the right demographics and companies able to innovate to take market share or build new markets. Corporate venturing can provide the diversification and access to these markets while local knowledge and a large balance sheet can be useful.
A number of companies, therefore, are increasingly turning to emerging markets, innovating themselves and using corporate venturing as a tool, while recognising these are longer-term investments. To see the winners of the next five to 10 years, look to businesses having the confidence to invest themselves rather than pay the money out in one-off presents. Albeit, they will be the winners if they are still around in that time through poison pills and shareholder structures to prevent themselves being taken over.