Why Cash-Hoarding Companies May Have an Edge
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The Fiscal Times
March 14, 2012

Investors’ hunger for dividend stocks just can’t be satisfied. Hardly a day goes by without some financial strategist or other pundit urging them buy to their hearts’ content.

That’s why it was all the more surprising to open up a position paper written by Bob Turner, chairman and CEO of Turner Investments, a Berwyn, Pennsylvania firm with more than $13 billion in assets, reminding us all that there is more to life than dividends. Indeed, he and his team at Turner are growth investors: while they may not be violently opposed to dividends as an article of faith, nor are they about to join the throng banging the table and demanding that Apple start paying out some of its cash hoard to its shareholders as dividends.

Turner admits that corporate America is hoarding its cash, and even compares companies like Apple to compulsive real-life hoarders like those portrayed on reality television. But there, he argues, the comparison breaks down. Corporate hoarders aren’t psychologically dependent on their cash, unable to part with it for any reason. Rather, they may have perfectly sound uses to which they can put that cash, other than paying it back as dividends and, as growth investors, his firm would rather own stocks that are growing by reinvesting surplus cash. “Without a continuing commitment to reinvesting cash in the business, a company can’t develop proprietary new products and services, stay competitive, or remain profitable for long,” he writes.

Both the hunger for dividends and corporate America’s reluctance to dole it out have their roots in the financial crisis and its aftermath. Only yesterday, Federal Reserve policymakers repeated their pledge to keep interest rates at rock-bottom levels until at least 2014. Meanwhile, corporations vividly remember the frozen capital markets after the crisis and don’t want to be held hostage to that kind of event in the future. As a result, corporate profits now represent an astonishing 10 percent of GDP, well above the post-1947 average of about 6 percent.

Other uses for cash include debt reduction – OK, it’s hardly sexy, but as Turner points out, it’s preparing the way for future growth by keeping corporate finances in order – and acquisitions, such as eBay’s purchase of PayPal that was a win-win for both companies. And today’s low-interest rates make it easier to complete such deals by arranging financing.

Turner makes several solid points in his analysis regarding investor attitudes to dividends. Anyone tempted to invest on the basis of a particularly high yield, may find himself or herself owning a stock whose dividend is only high because its stock price is sinking, and that stock price is reflecting lousy earnings or deteriorating demand.

Over-reliance on a portfolio made up of dividend-paying blue chips can lead to underperformance.  While the stocks in the Dow Jones Industrial Average were up 6 percent at the end of February, the Nasdaq 100 Index, full of high-growth companies that don’t pay dividends, was up 15.2 percent. Then there’s the prospect that Americans will end up paying much higher taxes on dividends after this fall’s presidential election.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.