In every analysis one has to look at the glass and say it is half full or half empty? The market will react to all types of news and events, but one ability for institutional investors is to examine the cash on balance sheets of the S&P 500 companies.
In an article by Lewis Krauskopf of Reuters, according to Keith Lerner, chief market strategist at Truist Advisory Services, cash on balance sheets of S&P 500 companies has increased from $1.5 trillion to over $1.9 trillion when compared to the pandemic crisis in early 2020.
We know when consumers have cash, there are 2 things to do with it – spend it or save it/invest it, companies can do the same thing. The difference is when companies do it, shareholders can benefit.
If the company does a stock buyback, it has the affect of lowering the number of shares outstanding which means if the company trades at the same multiple, the price can raise to match the previous multiple. Companies have announced $350 billion in buybacks in the 2nd quarter, the largest since the 2nd quarter of 2018 when $275 billion was announced.
Another way to spend the cash would be to increase the dividend directly to shareholders, although if a company increases the dividend, it would be expected to pay the same dividend or increase it the following year. Total S&P 500 Dividend payouts rose 3.6% in the 2nd quarter, although that was short of the record payouts in the first quarter of 2020, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
If the company decides to invest the money as some will, Goldman Sachs is projecting S&P 500 cash spending on mergers and acquisitions will jump by 45% to $324 billion this year.
Linking to dividend paying stocks, if the stocks you own are profitable, expect to be rewarded one way or another as the company decides what to do with the extra cash. Deciding what to do is always a good position for a company to be in.
There are more questions than answers, till the next time – to raising questions.