2nd August 2010
The Gartmore Global Equities team has uncovered evidence that companies are increasing the cash on their balance sheets. They believe that this will result in more share buybacks and takeover activity, both of which would be supportive of higher share prices.
Data from the Bank of Japan reveals that Japanese companies have accumulated a record amount of cash. The report on Bloomberg says that at the end of March non-financial companies held 202.7 trillion yen ($2.2 trillion) in currency and deposits, which is the most it's been since the quarterly records began in 1997.
It goes on to say that this preference for cash parallels trends in the US. In the year to the end of March American companies increased their liquid assets by 26% to $1.84 trillion, the highest level since records began in 1952.
Ultimately this cash belongs to the shareholders and they will not tolerate companies hoarding it for too long.
One option is to use it to finance capital expenditure, but a report in the Wall Street Journal suggests that this wouldn't be well received. It explains how the market has been punishing companies that plan to expand, while rewarding those that are keeping capacity in check.
This leaves the three main options of: share buybacks, dividends and takeovers, all of which tend to be beneficial for investors.
Examples of recently announced share buyback programmes include: Viacom, GE, Fidelity National Information Services and Hasbro.
The latest takeover news has revolved around possible deals involving: Reckitt Benckiser and SSL International; News Corp and BSkyB; as well as NTT and Dimension Data.
According to Reuters, a string of takeovers has enlivened the UK's M&A activity . This has highlighted the pent-up demand for deals among cash-rich companies and private equity firms.
Neil Rogan, head of global equities at Gartmore, says the fact that companies are building up their cash levels is very significant.
"The corporate sector surplus acts as a much needed counter-balance to the public sector deficit and the cash build-up is a win-win for shareholders. Either the money will be invested in value creating projects or it will be returned to shareholders. Both these are beneficial to investors."