NEW YORK (TheStreet) -- Deutsche Bank equity strategist David Bianco has five compelling ways for S&P 500 companies to increase their stock price in 2014 after broader indices gained nearly 30% last year in a still bumpy U.S. economic recovery. Bianco's recommendations include strategies to squeeze out further expense reductions after years of cost cutting and ways of putting corporate cash to work in an economic manner for shareholders.
To improve share price performance, Bianco recommends S&P 500 index CFO's increase their net debt, raise dividend payout ratios, lower pension burdens through lump-sum settlements, project more realistic investment return hurdles on capital investment projects and look to offshore their headquarters as a means to "improve tax efficient access to global cash flow."
"These actions relate to capital structure, investment and risk budgeting, shareholder distributions, and long-term tax planning," Bianco said in a Monday note to clients.
Those recommendations aren't likely to surprise many C-Suites, who've pulled similar levers in recent years to generate record profits in a still-weak growth environment. Four of the five ways at creating shareholder value also likely aren't likely to lead to any meaningful employment gains, raising the prospect of a worsening disconnect between U.S. corporate performance and the wider economy.
Corporate profits continue to reach new records, even as unemployment across the U.S. remains high and middle class incomes stagnate.
Still, in an environment where activist and private equity investors are ready to pounce on inefficiently run companies, many C-Suites are likely to heed Bianco's advice. For instance, Apple (AAPL), one of the largest companies in the U.S. by market cap, has spent recent years implementing financing and tax strategies that accomplish most of Bianco's recommendations.
Issue long-term fixed rate debt to increase net debt/market cap
"The cost of equity vs. long-term debt remains very high for large companies. Despite some debt issuance, net debt to market cap of S&P non-financials is at a record low of 14% vs. 29% avg. since 1967 and 35-40% in the late 1980s," Bianco says.
Raise dividend payout ratios (again): Strong DPS needed to support valuations
"Dividend yield is the most tangible link between PEs and interest rates. Income starved investors want stocks with good DPS yields and strong DPS growth. The longer yields stay below normal the more investors will turn to stocks for income. Given the demand for yield and what remains a low dividend payout ratio at the S&P vs. history, we advocate and expect the payout ratio to climb again from 30% in 2012 and 33% in 2013 to 35% in 2014 and 37% in 2015. Our 2014E & 2015E S&P DPS is $42 & $46.50 or up ~15% & ~12%. Most large companies that fail to deliver double-digit DPS growth will likely underperform," Bianco says
Reduce pension risk with lump-sum settlements and liability matched assets
"Companies can offset the risk from more debt by reducing pension plan risks. It is more tax efficient to take capital structure risk than pension risk because interest is deductible. Moreover, mature plans (especially if closed to new employees) no longer have the lengthy time horizons needed to diversify cyclical risks and once full funding is reached it is difficult for sponsors to benefit from a surplus. Thus, as more plans achieve full funding from rising yields and equities, we expect a significant asset shift into long-term bonds," Bianco says.
Dump the double-digit ROI hurdles for capex: Be realistic about interest rates
"Capex decisions should rest upon expected returns relative to the risk adjusted cost of capital, not the cost of debt. However, we think many companies are using out-of-date WACC based ROI hurdles that do not reflect current interest rates. The CoE is uncertain, but a lower WACC can be locked in with debt. We think most S&P firms should pursue projects with expected IRRs above 8%," Bianco says.
U.S. tax on foreign profits remains a risk: Why not incorporate elsewhere?
"For companies that increase debt usage and dividend payouts, while also maintaining healthy buyback activity and capex growth, as we advise and expect, it will be important to have tax efficient access to offshore cash and FCF. Currently, US companies cannot use foreign earnings for dividends or buybacks without paying US repatriation taxes. Although this policy is being deliberated and is sensitive to US political outcomes, change isn't likely in the next two years. Companies that can change domicile, possibly via acquisitions, could devote more of their global cash flow to US capex and shareholder distributions while keeping a US exchange listing, staying in the S&P 500, and paying dividends to US shareholders that qualify for lower dividend tax rates," Bianco says.
-- Written by Antoine Gara in New York