If the financial crisis of 2008-2009 taught us anything, it is that cash is king for corporate America. Those companies with ample cash on their balance sheets were able to weather the frightening storm when the credit markets seized up and didn’t thaw for many months. It got to the point that some firms were worried that they might not even be able to make payroll. Managements are being safe rather than sorry when it comes to having enough liquid cash on hand. Is this always a good thing?
Mountains of Money
According to CFO Magazine, the 405 nonfinancial companies in the S&P 500 held cash equivalent to almost 8% of their market capitalizations as of the third quarter of last year. This was close to 80% higher than the same ratio of just three years earlier. On the surface, this is a wonderful thing as it gives these firms the flexibility to manage operations during tough times.
However, many do not see things in this positive light. Having piles of cash on the balance sheet is a double-edged sword. Some shareholders see it as a sign that the company has run out of investment opportunities for growth and might be misusing the funds if a dividend or share buyback isn’t planned. Too much cash allows for management to be frivolous with that money rather than put it in the hands of its shareholders.
The best thing to do is institute a share buyback or increase the dividend payment to shareholders. Either one is usually a good use and is beneficial for holders of the stock. The best of all worlds is a company that is able to invest the cash into further growth opportunities, but that is not always possible for a mature company.
Here are two companies that need to either buyback more shares or increase their dividend yield:
Cisco Systems (CSCO) had over $40 billion in cash as of the most recent quarter. It recently instituted a dividend that amounts to 1.4%, but that doesn’t seem sufficient. The stock has been an abysmal performer lately, and a 3-4% yield would attract a whole new batch of income-oriented investors.
Dell (DELL) had over $14.3 billion on its books as of the most recent quarter. This represented almost half of the company’s market capitalization. The company pays no dividend, and has not been a good performer as competition and lack of innovation has hurt it. Starting a dividend would again be a boon to investors and attract many more buyers.
Cash is still king for corporate America, but investors want it to be put to good use and don’t like it to sit in a low interest rate money market account. Putting that money to use is a challenge and one that firms better face if they want to keep shareholders happy.
Cash Is King… Most Of The Time is an article from: 
