Healthy U.S. Corporate Balance Sheets within an Unhealthy U.S. E

Many U.S. Corporations continue to have very healthy balance sheets with significant percentages of cash on hand.   To this end, according to a January 10, 2011 report entitled, A Cash Buildup and Business Investment, by Robert Sadowski of the Federal Reserve Bank of Cleveland, highlighted cash holdings and other liquid assets as a share of total corporate assets rising around by approximately 2% since the start of the most recent recession. This share; 7.4% as of September 2010, is the highest relative cash % for U.S. corporations since the mid-1950s.   The cash on hand could support potential business expansions, dividend increases, stock buy-backs and/or mergers or acquisitions (M&A).   All of these potential deployments of cash listed above could be positive not only for the each respective company but also for the stock market and economy as a whole.

Thus far in 2011, we, at Hennion & Walsh, have observed a number of dividend increases and a robust level of M&A activity during the 1st quarter of 2011 that has slowed down, along with the equity markets, during the 2nd quarter of the year.

On the dividend front, many U.S. companies have used the excess cash on their respective balance sheets to increase the cash dividends paid to their shareholders.  According to a July 6, 2011 article on eDividend Stocks entitled, “Dividend Payments Improved Again in the Second Quarter,” 444 companies announced dividend increases, amounting to a total $11.2 billion in additional dividend payments to investors, during the second quarter of 2011.  This represented a 33 percent increase on a year-over-year basis.  Equally important, during the 2nd quarter, only 21 companies announced stock dividend cuts.  This amounted to a 38% improvement on a year-over-year basis.

These dividend increases, along with the underlying favorable tax treatment of dividends in general as afforded in the Bush-era tax cuts extension, could make value oriented, dividend investment strategies attractive during the balance of 2011.  This level of “value attraction” could further be enhanced by the increased volatility that we anticipate to take place in the uncertain capital markets over the short-intermediate term.

On the M&A front, according to Reuters, M&A deals announced in the second quarter totaled $611 billion.  Although this amount was 23% lower than the deals announced during the first three months of the year, the year-to-date (YTD) pace still paints a positive picture as it relates to the potential of these deals to jumpstart a stalling economy.   With credit to Reuters again, worldwide M&A activity has risen 40% thus far this year to a total of $1.4 trillion.   The Top 10 M&A deals, completed and pending, thus far in 2011 not involving shareholders as the acquirer are as follows according to Bloomberg:

Acquirer Name & Target Name

1)      AT& T & T-Mobile U.S.A
Announced Total Value: $39 billion / Cash & Stock / Pending

2)      Duke Energy & Progress Energy
Announced Deal Value: $26 billion / Stock / Pending

3)      Johnson & Johnson & Synthes Inc
Announced Deal Value: $19 billion / Cash & Stock / Pending

4)      Brasil Telecom SA & Tele Norte Leste Participac.
Announced Deal Value: $17 billion / Stock / Pending

5)      Prologis Inc. & Prologis
Announced Deal Value: $16 billion / Stock / Complete

6)      Gama SPE Empreendiment & Cia Brasileira de Distrbuic.
Announced Deal Value: $14 billion / Stock / Pending

7)      Takeda Pharmaceutical & Nycomed A/S
Announced Deal Value: $14 billion / Cash / Pending

8)      Vivendi SA & Societe Francaise du Radio
Announced Deal Value: $11 billion / Cash / Complete

9)      Nomura Holdings Inc. & Nomura Tochi Tatemono
Announced Deal Value: $11 billion / Cash / Complete

10)    Exelon Corp. & Constellation Energy Group
Announced Deal Value: $10 billion / Stock / Pending


Additional deployments of excess cash on corporate balance sheets could be just the sort of private stimulus that the economic recovery needs.  With this said, we remain concerned that corporations will find it difficult to pass along increased commodity costs to already strained, and recession weary, U.S. consumers.   This dilemma could put balance sheet strains on operating margins which could further have an impact on earnings.

However, on a positive earnings note, Alcoa* started off the 2nd quarter earnings season by posting better-than-expected revenue and providing a positive forward looking outlook for the company and aluminum industry as a whole.   It will be interesting to see how companies in other industries fare this earnings season.

*Neither Hennion & Walsh Asset Management nor any of our customers currently hold a position in this stock.