Unfortunately, M&A opportunities are few and far between these days, and that’s a shame, says Moody’s – because there are plenty of companies out there with the cash to indulge in a little M&A activity.
Instead, companies are using their overload of cash and free cash flow to sweeten dividend payments and thereby attract new investors, or they’re buying back their own stocks.
“Companies are increasingly using their large cash balances to boost dividends and share repurchases to attract investors, since growth and M&A opportunities have become limited or less desirable from an equity standpoint,” said Neil Begley, a Moody’s Senior Vice President.
Begley said the use of cash rather than debt will have the beneficial effect of leaving corporate credit ratings untarnished. Up to a point.
If the practice continues and the economy remains stable, cash balances can dwindle to pre-recession levels, and dividend levels that become habit forming can harm credit ratings.
This is especially true “…if they have high exposure to cyclical revenue or have upcoming debt maturities which they may not be able to fund with annual free cash flow.”
“Companies that simultaneously decrease leverage, maintain large cash balances or boost free cash flow such as CBS and News Corp may be less exposed to risk from high dividend payouts, says the rating agency,” Moody’s concluded. “Companies which retain flexibility by using share buybacks – which companies can halt at any time instead of dividends, are also less exposed as long as they maintain healthy liquidity and fund the repurchases with cash flow…Still, Moody’s expects shareholder-friendly initiatives to continue as companies compete for investors throughout the ongoing tepid recovery and beyond.”