U.S. corporations continue to accumulate cash, with the latest data showing that companies were holding $1.79 trillion at the end of last year, up from $1.77 trillion at the end of the third quarter. And it’s not clear whether there’s anything on the horizon that could encourage companies to start putting some of that money to use.
However, U.S. companies are not alone in holding sizable amounts of cash, since the trend is also clear among European companies, according to Anthony Carfang, a partner and director at consultancy Treasury Strategies.
The immediate impact from a stock buyback is usually positive, given the confidence the purchases convey, said Milano, pictured at left. But “the evidence in the market is that the companies that heavily buy back stock on average generally don’t do well.”
Dividends work better than buybacks, according to Milano. “The thing about dividends that there is no price risk. If you pay a dividend, you’re just giving money back to shareholders. If you buy back stock at $600 and then it drops to $400, all the people who stuck with you are upset because you paid the people who left $600 a share,” he said.