I think we would all agree that one of the best “problems” to have is extra cash on hand.
It’s not a problem at all, of course. But you still need to decide what to do with it.
You could leave it alone, but in a time of high inflation you would essentially be losing money. And even as interest rates have jumped in 2022, the return on savings accounts, CDs, and money markets remains pretty pathetic.
You could spend it, some or all, on necessities or luxuries. Maybe get that new smartphone or TV set. Take your dream vacation. Tackle projects you may have put off because you didn’t want to spend the money before.
Or… you could invest it.
Corporations face similar decisions when they are flush with cash. If you think this time of high inflation and slow or even negative economic growth means companies aren’t stockpiling cash, think again.
Many companies are sitting on sizable war chests. And they are setting records with what they are doing with that cash.
Investors need to be aware of this because what they’re doing with all that cash builds shareholder value – and shines a bright light on the stocks most worth buying today…
Apple to SHOCK Emerging $46T Industry
Analyst who ranked as America’s #1 Stock Picker by TipRanks says Apple is about to unveil a device that could be their next trillion-dollar product. Details here.
Companies Are Returning Record Cash to Shareholders
Regular Smart Money readers may recall that Eric Fry set the scene for us in the August issue of his Investment Report. (By the way, Eric is releasing the new issue of Fry’s Investment Report tomorrow. You can learn how to access it here.)
In that issue, he showed us how companies – and consumers – are sitting on a ton of cash right now. As Eric wrote…
U.S. money-market funds, checking accounts, and savings accounts hold a combined $21 trillion – or 50% more than they did four years ago.
Corporate balance sheets are also holding record-high cash levels. At last count, the world’s corporations were sitting on $6.8 trillion of cash and cash equivalents.
A lot of that cash is probably itching to get off the sidelines and into the game.
He also shared the chart below… a picture that shows this growing pile of cash better than any amount of words could:
Corporations are getting a lot of that cash back into the game – and back to their shareholders – through dividends and share buybacks. Dividends increase value through direct payments per share, whereas buybacks do it a bit more indirectly.
Share “buybacks” are exactly what they say. A company buys its own shares on the open market, paying the same price any investor would, and then takes those shares out of circulation. This reduces the “float,” or the number of shares available on the market, which makes the remaining shares more valuable.
Buybacks also boost earnings per share by definition. Total net income spread across fewer shares results in a higher dollar figure per share.
According to researchers at S&P Dow Jones Indices, S&P 500 companies will spend more than $1 trillion this year on buybacks and another $500 billion on dividend payouts. That combined total of $1.5 trillion would be an all-time high.
Oil companies are shelling out a significant chunk of these dividends and buybacks. They have accumulated tons of extra cash this year thanks to high oil prices. Exxon Mobil Corp. (XOM), the second-largest oil company in the world (behind Saudi Arabian Oil Co.), is on pace to buy back $30 billion worth of its own stock this year.
But plenty of other companies are also sitting on massive cash piles. Apple Inc. (AAPL), the most valuable company in the world (behind Saudi Arabian Oil Co. again) with a $2.5 trillion market capitalization, has gobbled up its own shares in a big way – $85.5 billion worth last year, with a current authorization to spend up to $90 billion this year.
We’ve Reached a Desperate Time
With the wealth gap being larger than ever before, something needs to be done.
We don’t need 90% wealth taxes or Universal Basic Income; what we do need is to have more people understand the phenomenon currently taking over the economy…
It’s something I call the “Technochasm,” and it’s currently splitting America in two. Some people are getting wealthier and wealthier, while others seem to be falling behind.
I’ve outlined a series of steps you should take today if you want the chance to end up on the right side of the Technochasm.
What the Buyback Trend Tells Us
Stock buybacks have their critics. There is risk, similar to when you or I buy a stock. If it goes down in value, we lose money. On the other hand, that’s why buybacks are often good indications that management believes its stock is undervalued.
Others question whether companies are ultimately better served using their cash in other ways, such as expanding the business or acquiring other companies to boost future growth. There is no one-size-fits-all answer to that. Many factors determine the best use of cash for any particular company, which is why stock analysis should include how management uses its financial resources.
Some also believe that buybacks boost earnings per share artificially. If a company’s net income stays flat but earnings per share increases simply because there are fewer shares, it can look like the company is growing when in fact it is not. It’s a legitimate concern, but the good news is that all of this information is publicly available, so investors should be able to see what’s going on with companies they own or are considering investing in.
Still, the outcome of companies returning records amount of cash to shareholders seems much more positive than negative. Shareholders make more money, and the willingness to use cash in this way tells us that these companies are confident in their futures and that they believe their shares are undervalued.
This is similar to Eric Fry’s current outlook for individual investors. As he writes in the August Investment Report, 2022 has been a tough year, but he is now seeing opportunities to put cash to work in undervalued stocks operating in powerful megatrends…
All I know for certain is that stocks are much cheaper now than they were last fall. Although the major averages bounced nicely from their mid-June lows, they are still trading 15% to 25% below their all-time highs, and many excellent stocks are down 50% or more.
I also know that major averages like the tech-heavy Nasdaq Composite rarely fall as much as they have recently. But when they do, they usually offer outstanding investment opportunities…
Because megatrends can power extraordinary growth, the stocks that benefit from these trends usually recover from wicked selloffs more quickly than most other stocks. Moreover, as megatrend stocks recover, their rapid growth usually enables them to compound their gains more quickly than most other stocks.
The common theme is putting money to work in an intelligent way at a time when these investments are much cheaper than they were just a year or so ago. Companies that are generating cash and growing and whose stocks are undervalued are in a good position to look to their own stocks. Investors have the benefit of casting a much wider net to find some of the best buying opportunities out there.
I know for a fact that Eric is writing more about this in the new issue of Fry’s Investment Report that will be released tomorrow. He also highlights new buying opportunities that he sees as attractive investments now for big long-term profits. Click here to learn more and to be among the first to get Eric’s latest analysis and recommendations.
Regards,
Dave
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
