Pleasant headache dept: What to do with all this cash flow?


Stock MarketBy a number of standards, the Great Recession is over – companies that survived by getting leaner and meaner are now still lean and mean, but now they’re raking in cash. But M&A activity remains subdued, so how is all that income being spent?

The Mediator at SNL Kagan has the answer for many of the biggest media companies out there – what they are doing is buying back stock.

Disney, News Corporation, Time Warner Inc., and the Redstone twins Viacom and CBS are all on the roster of prominent buyback participants, spending hundreds of millions running into billions of dollars in the effort.

During Q1 2012, according to Kagan, Disney pulled back $899.5M worth of stock; News Corp. bought spent $817M (and may go as high as $5B going forward); TW spent $730.6M; Viacom $699.9M and CBS $270.3M.

For Time Warner and News Corp., the Q1 spending follows the expenditure of “more than $1 billion on repurchases in both the third and fourth quarters.”

Melissa Link of Fitch Ratings analyzed the situation for Kagan. She told SNL Kagan: “What’s happening now is kind of rooted in what happened in 2008 and 2009, when the advertising market collapsed and the credit markets froze. In the tighter liquidity and weaker financial environment, financial policies became very conservative. Companies stopped share buybacks, and you saw dividend cuts at some of them.”

Media companies remained cautious after the economy began to turn.

Now they have cash, but there is also a lack of M&A targets – exacerbated by a lack of will to take on M&A risks after so many deals turned out sour before the Great Recession.

There is also fear of a return to recessionary conditions – that tends to rule out big increases in dividends, because once increased they are difficult to take back down without generating very bad signals to the investing community.

Another factor is the lack of high yield investments – interest rates are low, so there are few places to park cash where it will grow.

So stock buybacks become the choice of the day.

However, it is noted that this tactic can only be taken so far. So despite the lack of will and the lack of large acquisition targets, we may see big corporations begin to explore new options for using cash in the event the economy continues to improve.