Thursday, June 3, 2010

Show Me the Money

After looking at historical equity and bond data (going back to 1871) for my equity valuation analysis posts, I was reminded of the following Peter Bernstein piece regarding an event that occurred in 1958 (and was to last 50 years):

In the second quarter of 1958, the dividend yield on stocks was 3.9% and the yield on 10-year Treasuries was 2.9%. Three months later, dividend yields were down to 3.5% while Treasuries had climbed to match them at 3.5%. The next three months made history, as stock prices kept rising and pushed the dividend yield down to 3.3% while bond prices kept falling and drove the bond yield up to 3.8%. As the graph on page 2 demonstrates, this, too, was unprecedented. The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back.

When this inversion occurred, my two older partners assured me it was an anomaly. The markets would soon be set to rights, with dividends once again yielding more than bonds. That was the relationship ordained by Heaven, after all, because stocks were riskier than bonds and should have the higher yield. Well, as I always tell this story, I am still waiting for the anomaly to be corrected.
This "anomaly" corrected briefly during the crisis, but Treasury yields are once again higher than dividend payouts.

But is this about to change?

Rather than paying out dividends (or using cash to make acquisitions), corporations have been hoarding cash at an unprecedented level. Marketwatch provides the money quotes:
"Keeping cash on hand for a rainy day is a good idea. The currency stores at some tech firms, however, leave them prepared for a stormy 40 days and 40 nights," said Patrick McGurn, special counsel for RiskMetrics, a shareholder advisory firm.
And the details:

Which makes me wonder... if companies continue to prefer to act like cash cows (rather than make capital expenditures) and cash continues to yield close to zero, what is the chance corporations begin to give some of this cash back to shareholders and reverse this long term trend?

Source: Irrational Exuberance