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Cash-rich firms search for ways to reward investors

U.S. dollar bills


When the financial crisis erupted two years ago, companies started hoarding cash in a desperate move to ride out the downturn.

Now that the crisis has passed, the money is starting to burn a hole in their pockets.

With the economy improving and shareholders eager to get their hands on the bulging corporate piggy bank, companies are using their excess cash to increase dividends, buy back shares and explore mergers and acquisition opportunities.

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"We went through one of the worst economic downturns since the Great Depression," said Tony Demarin, president of BCV Asset Management in Winnipeg. Now that firms are feeling more confident, "they're starting to deploy their cash."

This month, companies such as Teck Resources Sherritt International Telus Corp. and Canadian Tire Corp. - among many others - announced dividend increases. And analysts expect more dividend hikes in the months ahead.

For Canadian Tire, the hefty 31-per-cent dividend increase was its first since 2008 and underscored the retailer's improving outlook. Canadian Tire also repaid $300-million in debt that matured during the third quarter.

"We have managed conservatively through challenging economic conditions and we have confidence in our continued performance, which is reflected in our decision to increase our dividend," chief executive officer Stephen Wetmore said in a statement.

In the United States, 299 companies raised their dividends during the third quarter, up from 191 in the same period a year earlier, according to Standard & Poor's. The number of dividend cuts, meanwhile, plunged to just 35 from 135.

"We can comfortably say that the dividend recovery is under way and … the bleeding in dividend cuts has stopped," said Howard Silverblatt, senior index analyst with S&P.

Buyback activity has also soared, as U.S. companies repurchased $132.9-billion (U.S.) of stock through the first half of 2010, up 142 per cent from $55-billion in the same period of 2009. When a company buys its own stock, it reduces the number of shares outstanding, which increases earnings per share.

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Powering all those dividend increases and stock buybacks is nearly $1-trillion in cash and short-term investments sitting on the balance sheets of U.S. non-financial companies. According to Moody's Investors Service, industries with the most cash at midyear were technology ($207-billion), pharmaceuticals ($124-billion), energy ($105-billion) and consumer products ($101-billion).

There's so much cash sloshing around that U.S. companies could cover dividends and capital spending for an entire year and still have $121-billion left over, Moody's said.

The cash has come from several sources. When the financial crisis hit, companies went into survival mode by laying off employees, idling plants and not replenishing inventories. They also took advantage of low interest rates in debt markets to raise cash, particularly in 2010.

Now, firms are under increasing pressure to invest the money or return it to shareholders. Microsoft one of the most cash-rich companies around, hiked its quarterly dividend by 23 per cent in September, signalling its intent to dig into its $44.2-billion war chest to appease investors. Last week, Potash Corp. of Saskatchewan announced a $2-billion share repurchase program in the wake of BHP Billiton Ltd.'s failed $38.6-billion bid for the fertilizer producer.

With corporate coffers bulging, companies are also signalling a renewed interest in making acquisitions. According to a survey by Greenwich Associates, 42 per cent of Canadian companies expect to seek mergers and acquisitions advice in 2011, up from 28 per cent in 2009.

The financial and natural resources industries are expected to be especially busy in 2011, with 78 per cent and 71 per cent of firms, respectively, planning to seek M&A advice.

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"That's an optimistic sign," said Jay Bennett, managing director of Greenwich Associates. "They've got to feel a lot better today than two years ago. The world's not coming to an end, touch wood."

Five of the top hoarders and their war chests

Microsoft Corp.: $44.17-billion

Cisco Systems: $38.92-billion

Google Inc.: $33.38-billion

Oracle Corp.: $23.64-billion

Ford Motor Co.: $23.8-billion

In U.S. dollars, as of last reporting date. Excludes financial companies.

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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