Making More Out of LessBy Fisher Investments Editorial Staff, 11/12/2010
- Q3 marked the fourth strong quarter for corporate earnings in a row, with nearly 75% of S&P 500 firms beating expectations thus far.
- US firms are gearing up to deploy cash reserves via share buybacks and M&A.
- Along with other positive fundamentals, firms maintaining solid earnings growth and shrinking share supply is excellent news for investors.
Q3 marks the fourth strong consecutive quarter for corporate earnings in a row (reminders here and here), with nearly 75% of S&P firms beating expectations thus far. US firms are clearly healthy and making money. But what's going to happen with all of that cash? It has to go somewhere eventually—and a record amount hasn't moved an inch. US corporations are sitting on in excess of $1 trillion. The record cash stash isn't in itself bullish, but begs the question, "Now what?" That's the bullish bit, firms are increasingly seeing little choice but to put cash to work to further boost earnings for investors.
One way to increase earnings is to expand operations and develop new products. And firms are certainly spending money on themselves. But some savvy executives may also opt for a quicker route. Stock buybacks immediately boost earnings per share. And M&As (if done right) allow firms to buy proven profits instead of risking time and money generating them in-house. When shares are cheap, as they are now, and cash returns next to nothing—both strategies can be no-brainers. Stock buybacks and M&As also bullishly reduce aggregate share supply. If demand is steady or rises, prices move higher as overall share supply shrinks.
Conditions are ripe, and firms have the means—question is, are they taking advantage? Yup. In Q2, over half of the firms in the S&P 500 repurchased $77 billion worth of shares. Buybacks were up 220% over the same period last year and are predicted to reach $300 billion by year end—double 2009's total. Q3 was the busiest quarter for M&A activity since 2008. M&A activity swelled 68% from a year earlier, rising in excess of $850 billion.
Accelerated buybacks and M&As alone offer no guarantees about the future direction of stocks. But along with other positive fundamentals, they add credence to the view the bull is sustainable—good news for long-term investors.
*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.