You're Being Stiffed by Companies Hoarding Billions of Dollars for no Reason

BOSTON ( TheStreet) -- U.S. companies raised dividend payouts by $9.6 billion in the third quarter to keep hungry shareholders happy and attract those earning almost nothing on bonds.

That's chump change compared to dividend payouts of the past. And it comes at a time when the nation's companies are sitting on more cash than ever.

Dividend payout rates have historically averaged 52% of earnings per share, but are now running near all-time lows at under 30%, according to S&P Indices. Companies have "considerable room to increase payments," S&P Indices says. But they won't.

And it's not as if U.S. companies need more cash. At the end of the second quarter, they held a record $2.1 trillion, up 4.5% from the first quarter and almost 50% from the end of 2008, according to the Federal Reserve.

S&P 500 Index companies, excluding financial firms and utilities, held $976 billion in cash on June 30, the 11th consecutive quarterly record for cash balances. That amount represents 72 weeks of net income.

Financial giant JPMorgan Chase ( JPM) has the biggest cash holdings among S&P 500 companies, with $414 billion as of June 30. It has a projected dividend yield of 3.24%.

Yet, technology companies are among the largest cash hoarders. Microsoft ( MSFT), the world's No. 1 software maker, is the most egregious, with $51.4 billion, up 5.4%, or $2.7 billion, from the first quarter. It has a projected dividend yield of 3.09%.

Dominant computer-network firm Cisco Systems ( CSCO) held $44.6 billion, and has only a 1.49% projected dividend yield, close to the benchmark Treasury yield.

Google ( GOOG), the Internet search engine company, held $39 billion in cash, up 2.4% in the second quarter, yet pays no dividend. The same goes for iPad and iPhone maker Apple ( AAPL), which ought to be rebranded "iProfit." The company had $28.4 billion on June 30.

Those balances have only increased since then, as S&P 500 companies are expected to report higher third-quarter revenue and earnings, which means they're continuing to generate huge cash flows. Hiring is sluggish, as the unemployment has been stuck at or above 9% for all but two months in the past two years.

Yet, the share of dividend-paying public companies rose to 40% of 7,000 tracked by S&P Indices in the third quarter, up only slightly from 39.3% in the first and second quarters.

Dividend yields for those companies rose to an average 2.99% at the end of the third quarter, easily topping the yield on 10-year Treasuries. That rate is up from 2.51% at the end of the second quarter, and 2.39% at the end of the first.

That's still cheap on a historical basis, especially given the amount of cash companies are sitting on. They could easily loosen the purse strings, maybe do some hiring, build offices and factories, spend money on manufacturing equipment and, thereby, pump money back into the flagging economy and get it back on its feet.

Corporate boards, perhaps chastened by the events of 2008, are worried about the future and not willing to take chances.

"Part of the reason for the low (dividend) payouts appears to be the uncertainty over the economy, which prevents companies from making long-term dividend commitments," said Howard Silverblatt, a senior index analyst at S&P Indices.

"Stingy, cautious, concerned -- maybe even scared" would perhaps best describe corporate decision makers now, he said. "Companies have more money now than they ever had. They'd obviously like to do something with it, but their challenge is what to do with it."

But what they have is not enough for them. In addition to their booming cash flow, many of the highest-rated U.S. companies are borrowing or issuing bonds to take advantage of interest rates near all-time lows, even though they have no intention of putting that money to work.

"Companies are concerned about the fourth quarter," S&P's Silverblatt said. "There's not a high degree of confidence" about the future.

And that's not a good sign for the economy because the fourth quarter is when companies create budgets for the coming year and make all sorts of commitments, including equipment spending and hiring. That said, companies are expected to continue to raise dividends again in the fourth quarter, Silverblatt said.

Anthony Carfang, a partner at Treasury Strategies, a treasury-consulting firm that tracks corporate strategies for cash management, said 86% of the 250 U.S. companies his firm contacts each quarter said they have increasing cash flow from operations and 18% said they are also lifting debt issuance to take advantage of the low interest rates "even though they don't have an immediate use for cash."

The Federal Reserve's latest economic stimulus effort, Operation Twist, launched a month ago, has served to push down intermediate- and long-term borrowing rates, he said, so "A-credit" companies are borrowing to "cushion their balance sheet as protection from future uncertainties. There is a huge amount of uncertainty out there."

But the stated goal of Operation Twist is to push down interest rates to get companies to borrow and spend money.

Peter Cohan, a business consultant and professor of corporate strategy at Babson College in Wellesley, Mass., said one reason for the dearth of hiring and capital expenditures may be that U.S. manufacturers aren't expecting increasing demand for their products.

Their factories are running at 78% of capacity, versus the long-term average of 81%, he said, citing government data. "They are not going to add people until they run out of excess capacity."

Carfang said about 43% of the 250 U.S. firms his firm tracks, out of 400 worldwide, are increasing their capital expenditures, up from 33% last quarter, "so there is some loosening there." But most of that is going to maintenance of existing equipment and property, and only to the extent that it's absolutely necessary.

And companies are also more acquisitive, with 22% buying other firms, up from 19% in the second quarter and 17% in the first quarter, he said.

"Most of the other categories are pretty much unchanged," and that includes hiring, Carfang said.

"Our sense is that once cash gets to certain levels, some companies have a hard time defending not paying it out to shareholders," he said.

Another reason that companies are sitting on cash, Carfang said, is a little-known change by the Federal Deposit Insurance Corp. (FDIC) that offers unlimited insurance on non-interest bearing corporate bank deposits, a program that was launched at the end of 2008. "We believe that's attracted about $600 billion in corporate cash into the banking system over that time" to the present.

Given record-low interest rates, that's apparently an attractive option for companies worried about the future and no other alternatives.

"If they didn't have that (option), more would probably think about paying some of it out (in dividends and share buybacks) or investing in plants and equipment," he said. "Hiring is always the last to recover. Hiring lags higher earnings by quite a bit."

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