For Immediate Release
Chicago, IL- July 01, 2015 – Today, Zacks Investment Ideas feature highlights Features: LyondellBasell Industries (LYB), Gap Inc. (GPS), Harley-Davidson (HOG) and Deere & Co ( DE).
4 Shareholder-Friendly Cash Machines
Corporate America is flush with cash. Excluding financials, cash and short-term investments in the S&P 500 reached a record $1.43 trillion.
Businesses have several options when it comes to deploying their excess cash. They can make acquisitions, fund organic growth, pay down debt, or return it to shareholders through dividends or stock buybacks.
Of course, a company can just let that money sit in the bank and grow its cash hoard (which seems to be a popular choice today). But with interest rates still near record lows, they're generating very low returns for their shareholders.
If you own a company for the long-run, make sure you know how it is managing its cash.
Investing for the Future
Ideally, a company should use its capital to maximize long-term value for their shareholders. In his Annual Letter to Shareholders in 1992, legendary investor Warren Buffett stated:
"Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return."
Clearly some managers understand this concept better than others. Many corporate executives are more concerned about empire-building than producing high returns on capital and often make reckless decisions with shareholders' money that destroys value over time.
Assuming a company is investing prudently for the future and still has cash left over, a logical next step would be to return that cash flow to the owners of the business (i.e., the shareholders).
Buybacks & Dividends
It's not uncommon for companies to distribute more and more cash to shareholders as they mature. Bigger companies have less growth opportunities and compete in crowded markets, so they plow back less of their earnings into the company and more into shareholders' wallets. And dividends, along with stock buybacks, are the quickest and surest way to return value to shareholders.
When a company actually buys back its shares, it has a direct benefit in that it reduces the number of shares outstanding. This means that earnings are divided among fewer shares. In other words, your piece of the pie just got bigger.
Buyer Beware
If a company has the excess funds and their stock is undervalued, buybacks can add tremendous value over time. But make no mistake: stock buybacks don't always add value. In fact, history shows that companies are often bad at timing their repurchases, buying when their share price is high.