Companies can save investors by returning cash

  • US corporations can save the stock market by returning some cash to investors, Bank of America said.
  • The bank estimates that US corporations hold $7.1 trillion in liquid assets that can be returned to investors through dividends and buybacks.
  • “Corporate debt levels are at their lowest in decades, leaving ample room to calm nervous shareholders,” Bank of America said.

US corporations can save the stock market by returning a large part of their $7.1 trillion cash pile to investors in the form of dividends and share buybacks, Bank of America said in a note this week.

The S&P 500 is down more than 15% year-to-date while the Nasdaq 100 is down almost 30%, so investors are looking for redeeming qualities in owning stocks right now.

“The best hope for 2022 bulls lies in the ability of investors to dislodge $7.1 trillion in idle US corporate cash,” BofA said, noting that US corporations have not been so friendly to shareholders for years. the last decade.

Share buybacks and dividends from US companies are at 12-year lows, according to the bank, while 13% of S&P 500 companies have issued non-voting shares, leaving much of the control in the hands of the high direction. That is even as corporate debt levels hit their lowest in decades, “leaving ample room to calm nervous shareholders,” BofA said.

Until corporations become friendlier, “shareholders are going on strike,” the note said, noting that the current slump represents the worst “buy the dip” market since the 1974 time since COVID, and BofA analysts care more than ever about free cash flow for payments,” explained BofA.

Management teams across the country may be heeding BofA’s advice, as recent actions suggest corporate America is willing to be friendlier to shareholders. Stock splits are on the rise, with Amazon, Alphabet and Tesla being recent examples, and BofA’s US equities team expects dividends to grow 13% this year.

“We expect companies to face pressure to compete for shareholders by increasing dividends and buybacks in the face of lower earnings growth, falling productivity and lower prospects for profitable CAPEX,” BofA said.

Companies also compete for talent in a tight job market, and falling stock prices don’t help retain employees who have stock-based compensation.

“Companies that defend their share price can protect themselves from becoming acquisition targets or losing talent in one of the toughest job markets in history,” BofA said. “If defending a business requires that [debt] As leverage rises from record lows, investors are likely to see this as an attractive trade-off.”

To take advantage of the likelihood of higher payouts to US corporate shareholders, BofA recommends investors buy ETFs that invest in companies that pay dividends, buy back their shares, and have a high free cash flow yield. That includes the SPDR S&P 500 High Dividend ETF and the Pacer US Cash Cows 100 ETF.

“High cash, low debt, limited voting and low payouts…dividends have nowhere to go but up,” BofA said.

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