Nathan Field: Managers hoard cash, shareholders lose

Opinion

Microsoft is so flush with cash it could buy every stock on the NZX-50 and still be debt free.

Or it could bankroll the first two Hobbit films, more than a hundred sequels, and have enough money left over to buy the Crafar farms.

Neither scenario is likely but Microsoft's shareholders might prefer these left-field ideas to what management is doing with the money. Which is not much at all.

Admittedly, Microsoft has returned almost US$150 billion ($189 billion) to shareholders through buybacks and dividends since 2002 - so it's not completely ungenerous.

But even with a recent 23 per cent increase in its dividend, the stock is yielding just 2.5 per cent. If Microsoft boosted its payout to 50 per cent of free cash flow, the yield would be closer to 5 per cent, putting a solid floor under the share price and giving shareholders reason to smile.

Microsoft's US$48 billion net cash position is a standout but it isn't the only company keeping a tight grip on its purse strings. In the United States, balance sheets haven't been this healthy in 70 years.

Cash now stands at 11 per cent of S&P 500 assets - that's US$1.8 trillion, earning near zero returns. Why so stingy?

The same excuses keep getting trotted out by cash-hoarding management teams: the economic outlook is uncertain, or new developments are on the horizon, or they're keeping their powder dry for acquisitions.

But as the quarters roll by and the piles of cash continue to grow, shareholders are growing understandably impatient. They thought they were investing in companies, not bank deposits.

But the top dogs aren't listening - partly because they've grown overly attached to their bulletproof balance sheets, but also because business leaders seem to regard returning cash to shareholders as an admission of defeat. It's just not in their nature. They want to spend money on ambitious growth, not whinging investors.

Only executive hubris can explain the bizarre acquisitions routinely made by listed companies. Throw seven wealthy suits around a board table and you can guarantee there will be no shortage of self-belief in the room. Senior managers and directors think they've reached the top of the corporate ladder for one simple reason - they're awesome. So when their company is spitting out cash like a giant fruit machine, the last thing they want to do is to give the stuff back to shareholders. For one, they'd probably spend it irresponsibly. And for another, it would be a waste of management's prodigious talents.

Such ambition is fine when you're an Apple, or a Google, or a Sky Network TV - companies with tangible growth prospects that are reflected in their above-average earnings multiples. But when you're a Microsoft, or a Walmart, or a SkyCity Entertainment, shareholders would usually prefer to see a nice big lift in the dividend than a chunky acquisition. Yet none of these companies want to be perceived as "defensive" or "value", almost as if they were dirty words.

Over the years, some of New Zealand's largest companies have destroyed billions in value scratching this growth itch. Telecom, Fletcher Building, Air New Zealand and many others have been guilty of lurching outside their home markets when shareholders would have been better off with the cash in their pockets.

Often there are few or no synergies involved with such ventures, and Kiwi management is simply backing itself to do a better job than the previous owners. But outside the cosy confines of the New Zealand market, our executive teams have invariably discovered they're not quite as awesome as they thought.

It's even harder for a company like Microsoft.

During the 1990s, the stock was king of the technology sector on the back of its dominant Windows and Office lines.

Now, thanks to the explosion of the internet and threat of cloud computing, Microsoft is seen as something of a dinosaur. Its forays into internet search and smartphones have failed to impress, and as a result, the share price has barely moved in a decade.

Microsoft is producing enough cash to fund a healthy dividend and pursue growth opportunities - the two aren't mutually exclusive. But given its tentative approach to capital management, there is a feeling management is looking at more than just small or mid-sized growth opportunities. Microsoft wants its crown back.

Nathan Field is a senior equity analyst at Gareth Morgan Investments.