Friday, July 16, 2010

Show Us the Money!

By Eric Jackson
RealMoney Contributor

7/16/2010 7:30 AM EDT
Click here for more stories by Eric Jackson

On Monday, I was on CNBC's Fast Money, talking about a problem afflicting most of large-cap US stocks today -- chronic cash retention on their balance sheets. Excluding financials, U.S. public companies now have $1.6 trillion in cash sitting on their balance sheets, according to The Economist estimates. Now, the CEOs of these companies would argue that they need this cash as a potential cushion against the next downturn. After all, companies like General Growth (GGP) went bankrupt in the aftermath of Lehman Brothers' failure because they didn't have enough cash and were at the mercy of creditors who wouldn't roll over its debt as it matured.

However, that argument doesn't hold water if shareholders are saying, "keep your debt at zero, but reduce some of your cash hoard to pay us a better dividend". After all, it is the shareholders' money. Management has the right to run the company in such a way as to maximize its long-term value, but shareholders have the right to complain when they see management running it inefficiently.

Let's talk specifically here. Microsoft (MSFT -commentary - Trade Now) has $37 billion in cash and $22 billion in annual operating cash flow. It currently pays out a forward 2.1% dividend yield, costing it $4.5 billion a year. It could easily double that yield out of cash flow, paying $1 a share annually versus $0.52 currently. It would commit to paying that dividend going forward, giving shareholders a reason to continue holding the stock. (When it paid a $3 special dividend a few years ago, what was the incentive for shareholders to continue holding the stock after getting their money?)

I imagine that Microsoft (and many other tech companies that also cling to cash) would respond to this argument by saying that it is operating in a highly dynamic competitive environment. It is competing against Apple(AAPL - commentary - Trade Now), Google(GOOG - commentary - Trade Now), (CRM - commentary - Trade Now) and Research in Motion (RIMM -commentary - Trade Now) across multiple businesses. Last year alone, Microsoft spent $9 billion on R&D to try and stay competitive. Doesn't it need its cash to fund these important research activities?


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