India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Cash-rich companies
Companies are sitting on piles of cash, appropriate during the
liquidity crises but perhaps not so now
With cyclical indicators picking up again, shareholder pressure on
companies to deploy these cash reserves is likely to increase
We see both investment (capex and M&A activity) and returns to
shareholders (buybacks and dividends) increasing in 2011
Use it or lose it
Companies are cash-rich but will they start to
spend it? We think the answer is yes. A
combination of improving visibility on the macro
picture and improving business confidence should
persuade companies to deploy their surplus cash
reserves. And for those that continue to hoard
cash, the pressure is likely to build if investors,
quite rationally, demand that companies use it
(invest it) or lose it (return it to shareholders).
Interestingly, we are seeing tentative evidence that
companies are beginning to loosen their wallets.
Both the capex and M&A cycles appear to be
turning up and returns to shareholders are
increasing with dividends being raised and share
buyback programmes being restarted. We see all of
these drivers trending higher in 2011 and together
they should provide support to stock prices.
Companies have surplus cash…
Chart 1 and Table 2 highlight the fact that
companies are currently cash-rich. The first shows
cash as a percentage of current assets for the
MSCI US non-financials universe and the second
the breakdown by sector. We focus on the US
because the data is more time-sensitive due to
quarterly reporting patterns. Nevertheless, this
should be a good proxy of the global situation.
We can see that cash as a percentage of current
assets currently stands at a record level of 40% for
the market. And if we compare this to the average
level of 32% it suggests surplus cash of around
USD250bn for our MSCI US non-financials
universe
Table 2 tells us that the healthy cash position is
broad-based with all ten MSCI US sectors
currently registering a cash surplus position
(relative to the average since 1998).
…and are starting to spend it as the
business cycle stabilises…
The surplus cash theme is one that we have
actively been pushing since July when we
published Results season analysis: where’s the
double-dip?, 30 July 2010.
In the report we argued that, if the macro backdrop
were to show signs of stabilisation, companies
would likely start to either invest their surplus cash
reserves or return the money to shareholders
Interestingly, following a soft patch in Q2-Q3, we
are seeing signs that business cycle indicators are
beginning to stabilise and turn up again. This
point is highlighted by our currency colleagues’
‘US surprise index’ (see Chart 3).
This stabilisation is clearly important both for
those investors that feared another significant leg
down in economic activity and in terms of
business confidence in general.
…on capex…
All other things being equal, as companies
become more confident in the recovery we would
expect them to start to invest more. And the
evidence suggests that capex is indeed on the rise,
albeit from a very low level.
In Chart 4 we show new orders for both the US
and Eurozone. There are two important points to
note about this chart. First, it highlights just how
far capex budgets got cut during the recent slump
in activity. Second, the global capex cycle appears
to have clearly turned up.
Ongoing economic strength in emerging markets
and China specifically (see Theme 4, Chart 3) is a
key reason to be remain positive on the outlook
for capex and we reiterate our overweight call on
the global industrials sector. We would also
highlight technology and oil services as being
additional beneficiaries from a continued pick up
in capex
…and on acquisitions…
Rather than growing organically via capex, a
company may of course prefer to take the
inorganic route and make an acquisition.
As Chart 5 shows, we are seeing evidence that the
global M&A cycle is turning up – another
indicator of corporate confidence and a sign that
companies are starting to spend again.
We expect to see upward momentum in the value
of deals in 2011 on the back of a more stable
macro backdrop, rising business confidence, an
improvement in the availability of funds and
attractive valuations.
…or starting to give it back to
shareholders…
Of course, if companies cannot find any value-
enhancing investment opportunities for their
surplus cash then they may decide (or face
investor pressure) to return it to shareholders.
…via share buybacks…
There were some high profile announcements
during the Q3 results season that suggest share
buybacks are back on the agenda. For example,
BHP, having missed out on Potash, decided to
acquire the remaining USD4.2bn of its shares
from its USD13bn buyback programme which it
suspended in 2007. And Cisco announced an
additional buyback worth up to USD10bn as it
moves to return part of its huge cash pile
(USD39bn as at 30 October) to shareholders.
Record-low funding costs also appear to be
driving buyback behaviour with Microsoft being
the latest high-profile company to announce plans
to issue debt to pay for dividends and share
repurchases.
In aggregate (source: Bloomberg), US companies
have announced USD258bn in buybacks during
the first three-quarters of this year compared with
just USD52bn in the same period in 2009. With
companies generating strong cash flow in a low
rate environment, we expect the trend increase in
buyback activity to continue in 2011.
…and increased dividend payments
The same applies to dividends where the growth
rate (year-on-year) has now turned positive for the
MSCI AC World index
This is an interesting development given the
global equity dividend yield is already on a par
with the global risk free-rate (the US 10-year
Treasury yield). And with dividend cover a
healthy 2.6x (versus a long-run average of 2.4x,
see Chart 6) we see the potential for dividends to
grow in 2011.
Selected company
beneficiaries
Our sector analysts have identified the following
companies as being beneficiaries from the surplus
cash theme:
Rio Tinto (RIO LN, OW(V), GBP40.7,
TP GBP48.0). With the balance sheet now
cleaned up and M&A risk limited given the
board’s guidance of a return to conservatism,
we see the company generating cash returns
over the next 12 months (even under our
conservative commodity price assumption)
and ending 2011 with a net cash position of
USD5.5bn.
Richemont (CFR VX, OW, CHF53.2,
TP CFH66.0). Luxury companies’ balance
sheets were barely impacted by the downturn
and we see cash piling up in 2011. With
sizeable high-quality targets scarce, we expect
the cash to be returned to shareholders.
Richemont looks well placed with an
expected net cash position of more than
EUR2bn by end-March 2011 and annual FCF
in excess of EUR1bn in the next three years.
Bunzl (BNZL LN, OW, GBP7.04,
TP GBP9.40). Growth strategy of reinvesting
cash flow in small bolt-on acquisitions has
delivered cash returns of around 15-25%
historically. Ample scope for consolidation in
a fragmented market and a healthy balance
sheet supports an inorganic growth strategy.
Anheuser-Busch InBev (ABI BB, OW,
EUR43.78, TP EUR53.0). In 2011, we
believe A-B InBev will consider alternative
use of its cash due to the fact that the brewer
has aggressively paid down its debt. This
could include returning more cash to
shareholders and looking to become active
again in the brewer consolidation process.
China Coal (1898 HK, OW(V), HKD12.28,
TP HKD18.60). Strong cash flow will allow
further acquisitions, enabling the company to
hit its volume growth targets.
Pacific Basin (2343 HK, OW(V), HKD5.25,
TP HKD7.50). With cash of USD960m, the
company can opportunistically acquire lowcost vessels to maximise returns.
No comments:
Post a Comment