Companies stopped paying dividends and stockpiled cash during the Great Recession, and shareholders didn't complain. Now they want a reward for their patience.
American companies are holding $1.9 trillion in cash, a record. The large businesses that make up the Standard & Poor's 500 index, all of which answer to public shareholders, have $940 billion on hand — $300 billion of it accumulated since late 2008, says Howard Silverblatt, senior index analyst at S&P.
Shareholders want the companies to start putting that cash to use. The most pressure is coming from activist investors, who buy stakes in companies and then try to influence management to make certain changes that they say are in shareholders' interest.
"We've been in bunker mentality for too long," says Eric Jackson, who runs the hedge fund Ironfire Capital. He predicts that activist shareholders are about to become "a lot noisier."
The loudest investors are finally being heard. Companies are letting go of some cash:
— Since the start of this year, 116 companies in the S&P 500 have raised their dividend, up from 78 a year ago. Overall, S&P 500 companies have paid out $16.6 billion more this year in dividends than last year.
— Companies are buying back more of their own stock. Kohl's, Conoco and Intel all recently announced buyback plans recently. Stock buybacks by S&P 500 companies increased to a record $86.4 billion in the final quarter of 2010, the latest data available. That was 81 percent more than the same period the year before. Investors like buybacks because they tend to push up a stock's price since earnings are divided among fewer shares.
— Companies are doing bigger deals than they did a year ago. Global mergers and acquisitions were valued at $755 billion for the first three months of the year, 24 percent more than the same period last year, according to financial data-tracker Dealogic. The number of deals declined slightly, to 9,568 this year from 9,825 in early 2010.
Large investors want higher dividends because it means more cash in their pockets to make other investments. Individual investors, especially retirees who depend on dividends for a big part of their income, want more cash to live on.
With acquisitions, investors hope the deals will eventually lead to higher corporate profits.
Investors also don't want companies to let cash sit in the bank since interest rates are nearly zero, which means the money isn't earning much.
"The best use of cash is to deploy it," says Bill Miller, chairman and chief investment officer of mutual fund giant Legg Mason Capital Management. "If companies could maintain profitability and generate cash two years ago ... then they don't need that kind of cash on their books today."
What has happened over the past few months at Family Dollar illustrates the tension between companies and investors.
Hedge fund Trian Fund Management disclosed last July that it had bought a 6.6 percent stake in Family Dollar. Trian is run by activist investor Nelson Peltz, who is known for making big investments and then forcing change at companies.
When the investment was announced, Trian said it would work with Family Dollar to boost sales and open new stores, and that it had ideas on how the retailer could use its cash. At the time, the dollar-store chain's cash balance ran about $503 million, a record high.
By September, Family Dollar had announced plans to spend $750 million, including some cash and some new debt, to buy back its stock. In January, Family Dollar increased its quarterly dividend by 2.5 cents, to 18 cents a share.
Family Dollar says it worked with Trian to boost shareholder value. "They shared their ideas and we listened," spokesman Josh Braverman says. He also noted that some of what Trian wanted, including the buybacks and more rapid expansion, was in the works before Trian invested.
But Trian still wasn't satisfied. It made a $7 billion, all-cash, hostile bid for control of Family Dollar on Feb. 15 and announced it had raised its stake in Family Dollar to 7.9 percent, making it the largest shareholder.
Family Dollar rejected the bid in early March, saying it undervalued the business, and adopted a defense strategy to discourage unsolicited offers. Trian responded by sending a letter to Family Dollar's board saying that the company had "embarked on a path of poor corporate governance."
Trian didn't respond to a request for additional comment. It has already seen the value of its investment rise. Since it disclosed its investment in July, Family Dollar stock has gained about 26 percent, to about $52.
Fights like this are likely to be more common this year if companies don't accelerate their use of cash.
"Activists are interested in getting an outcome, but most do not need to storm the castle to get it," says David Rosewater, a partner at the law firm Schulte Roth & Zabel who advises companies and investors on shareholder activism.
Shareholder Joseph Stilwell, who mostly invests in community banks through his investment firm Stilwell Group, has spent the last few months meeting with corporate managers privately to discuss what he'd like to see done with the money. Those discussions usually happen in winter, well ahead of annual shareholder meetings that typically take place in the spring. That's when investors elect the board and vote on other proposals.
If he doesn't see a resolution to his liking, he says he might seek a board seat, or as a last resort, file a lawsuit. In the past, he has filed lawsuits to have directors removed from boards for breaching their responsibility to shareholders.
Some companies recognize that shareholders are focused on their ballooning cash balances. Kohl's, the discount department store chain, had a record $2.3 billion in cash on its books at the end of its fiscal year in January. The company recently announced plans for its first dividend, with a payout of 25 cents a quarter. The company also said it would more than triple its stock buyback program to $3.5 billion.
"We have had a very strong, consistent performance, and we wanted to make sure to give back to our shareholders," Kohl's CEO Kevin Mansell tells The Associated Press.
General Electric, with a cash balance of about $20 billion for its industrial businesses spree. In the past five months, it has announced acquisitions worth more than $11 billion, mostly in its energy business. One of the biggest bids came this week — a $3.2 billion deal for a French power conversion company.
Overall, GE has almost $80 billion in cash. The financial parts of its businesses, like lending arm GE Capital, are required to keep more resources on hand.
GE has also raised its quarterly dividend twice in the last seven months, first from 10 cents to 12 cents a share and then from 12 to 14. For the year, that means it would pay out 56 cents a share.
Two years ago, GE's dividend was more than twice that — $1.24 a year. Like many companies, it has a long way to go before it starts rewarding shareholders as well as it did before the Great Recession.