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The Cash Return Boom
Posted by: Fede Zaldua (IP Logged)
Date: December 24, 2013 02:58PM
With interest rates still at record lows (borrowing money is still very cheap), the U..S economy healing fast and activist investors such as Daniel Loeb and Carl Icahn more active than ever, companies are returning cash at a steady pace. According to the Wall Street Journal, “Combined stock buybacks and cash dividends totaled $207 billion in the three months ended Sept. 30, which also marked the highest level since the fourth quarter of 2007.” Let's take a look at two companies that are among those large capitalization players that should keep increasing their cash returns to shareholders.
Outperformance Is Always to Be Expected
History tells us to expect Halliburton (HAL) to outperform its self-imposed tough goals. For the 2013 to 2016 period the company aims to (1) Increase its deep-water revenues at a faster rate than the overall market without sacrificing margins, (2) triple its revenues at the Mature Fields business segment, (3) remain as the leader in unconventionals and (4) boost its return on capital employed from 11% to 20%.
Moreover, the company, which is held by George Soros, is using its strong balance sheet (net debt stands at just 0.85 times next year's expected EBITDA) to return cash to its shareholders. Through the month of September, Halliburton returned $3.3 billion to shareholders through buying back 68 million shares. Most analysts expect the company to spend up to $5 billion in share repurchases this year and I believe this figure should soar into 2014. Besides the company, which increased its dividend by 38%, also plans to maintain a dividend policy that will return about 15% to 20% of net income on an annual basis back to shareholders. That said, the current dividend yield still stands low at 1%.
Still an Outstanding Cash Flow Machine
Microsoft (MSFT), held by Glenn Greenberg and George Soros, is an incredible cash cow which is now very much in favor of giving those cash flows back to its owners. In addition, the company trades cheaply at 12.6 times 2014 earnings and has been able to report an outstanding first quarter driven by a stabilizing PC market, an improved commercial business (cloud infrastructure) and much better execution.
Back in September Microsoft announced a 22% increase in its quarterly dividend to $0.28 - leaving the cash yield at 3% - and a new buyback of $40 billion replacing the old $40 billion program which was set to expire at the end of September. More importantly, I would expect Microsoft to keep increasing its cash dividend and to keep its buybacks going at the current $40 billion a year pace.
For as long as rates remain at record low levels, companies with rich cash flows and low indebtedness shall remain distributing cash to its shareholders. Halliburton and Microsoft just represent two simple examples of companies that shall keep on increasing their cash distributions through dividends and buybacks. If corporate managements do not act by themselves soon enough, activist investors will surely remind them who is it that they are ultimately working for.
Guru Discussed: George Soros: Current Portfolio, Stock Picks
Carl Icahn: Current Portfolio, Stock Picks
Stocks Discussed: HAL, MSFT,