Jason Zweig wrote Saturday in the WSJ about how companies are hoarding their cash. Microsoft, Cisco, Google, Apple and J & J “added $15 billion in cash and marketable securities to their balance sheets. Microsoft alone packed away roughly $9 billion, or $100 million a day. All told, the companies in the Standard & Poor’s 500-stock index are sitting on more than $960 billion in cash, a record.” The proportion of earnings paid as dividends is at the lowest level since 1936.
What are they planning to do with the money? Well, MS paid almost precisely all of its additional cash, $8.5 billion, for Skype. Zweig asks, “[w]as that torrent of cash burning a hole in Microsoft’s pocket?”
The hoarding may be because firms don’t see opportunities in an uncertain, highly taxed and increasingly regulated economy. But whatever the reason, Zweig is right in saying, following Benjamin Graham, that if they don’t have good uses for the cash they should give it back to the shareholders. Zweig notes that Graham proposed that investors insist on payouts of inappropriately hoarded cash and set formal dividend policies, with leading companies paying out two-thirds of their earnings.
But managers generally have the final say over dividend policies. So what to do? Well, as Henry Manne proposed long ago, takeovers can solve this problem. More specifically, the kind of takeovers that turn publicly held corporations into private-equity managed uncorporations. As I’ve pointed out in numerous articles (e.g.) and in my Rise of the Uncorporation, the uncorporation replaces often-ineffective corporate-type disciplines like fiduciary duties and shareholder voting with financial discipline centered on debt and distributions, which restricts the amount of cash managers have to play with.
The uncorporation is not for all firms. But, alas, it may be for an increasing number of firms, even former growth firms, this economy has beached.
Meanwhile it would be nice to find away to create the kinds of growing firms that do have opportunities and might actually be able to use the corporate form.