Position of strength - Investors are now challenging businesses over their healthy balance sheets
When Computacenter published its results on 11 March, it also revealed its strong cash position would enable it to return up to £75m, over and above any regular dividend, to its shareholders. While this is a bonus in itself for the company’s shareholders, a medium-sized it services provider feeling able to do such a thing is also a good example of a broader trend witnessed throughout the recent results season.
It is getting on for five years since the depths of the credit crisis and this period of often very challenging trading conditions has forced most companies to react accordingly. After all the cost-cutting and disposals, balance sheet restructuring and rights issues, refinancing and squeezing of spending and working capital, corporate balance sheets are generally starting to look quite strong.
More than that, the rude health of many balance sheets is causing investors to question whether they might in fact be too strong, and what the companies concerned might be considering doing about that. That is a good place to be if you are an equity investor – always provided, of course, those businesses are sensible about what they do with the cash.
One consequence, as we have discussed in articles such as best dividend growth, is that businesses have been growing their pay-outs at reasonable rates. More and more, however, there have been calls for companies to return cash to shareholders in a lump sum, as Computacenter plans to do, or to buy back shares as the likes of BAE are now doing.
Along with an upturn in confidence in the debt markets, this also goes some way to explaining why merger and acquisition activity is picking up again. Here on The Value Perspective, M&A is something about which we are naturally cautious since companies on buying sprees do not universally share our eye for value. However value investors do tend to enjoy more than their fair share of success when it comes to having companies they own acquired by competitors or private equity.
Corporate balance sheets have come a long way over the last five years to the extent they have arguably passed beyond the point of stability and prompted a debate about what companies should do about their excess cash. If businesses are going to start investing more and returning more money to shareholders to reinvest elsewhere, that ought to be good news for everyone and for the economy.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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