Citi Research analysts Deane M. Dray, Matthew W. McConnell and colleagues released an investment report yesterday focusing on potential 2014 capital allocation catalysts. The report highlights that historically low interest rates over an extended period of time has led to strong earnings and cash flows, leaving many companies with significant balance sheet optionality for merger and acquisition activities.

Capital Allocation trends

“Urge to demerge”

The Citi report describes the “urge to demerge” as one of the primary themes for capital allocation and M&A activities in 2014. “One overarching theme likely to prevail in 2014 is the “urge to demerge”. Managements are seizing on “simplification” and “addition by subtraction” strategies to divest non-core businesses. In some cases, activists are pushing the companies to take action. We believe there have also been situations where simply the worry that an activist might show up at the door has prompted boards to take action.”

capital allocation list

Most likely to make a major acquisition

Dray, McConnell and colleagues also identified a number of companies they see as likely to make a major acquisition over the next few quarters. “Danaher has been extended into overtime in deploying +$8 bil of M&A capacity, but remains disciplined and in the hunt. Honorable mentions to 3M Co (NYSE:MMM), Roper Industries, Inc. (NYSE:ROP), and AMETEK, Inc. (NYSE:AME).”

Capital allocation: Most likely to attract activist investor interest

Although the pool of potential candidates has shrunk significantly over the last year or so, the Citi analysts also identified a few overly diversified companies they believe could attract an activist investor like Icahn or Ackman to shake things up. “Crane remains a bit too diversified for its market cap and trades at a sufficient discount to its SOTP to potentially attract an activist. Honorable mentions to Xylem Inc (NYSE:XYL), W.W. Grainger, Inc. (NYSE:GWW), Emerson Electric Co. (NYSE:EMR), and Actuant Corporation (NYSE:ATU).”

Most likely to have total shareholder payout as a catalyst

The Citi report also highlights a few firms that are likely to increase dividends or stock buybacks this year, with Honeywell International Inc. (NYSE:HON) as their top pick in the category. They mention a few other possibilities below. “We now consider “Total Shareholder Payout” as dividends + buybacks as a percent of earnings. Honorable mentions to W.W. Grainger, Inc. (NYSE:GWW), Dover Corp (NYSE:DOV), General Electric Company (NYSE:GE), and SPX Corporation (NYSE:SPW).”

Most likely to announce major dividend increase

Last but not least, the Citi analysts suggest that Federal Signal Corporation (NYSE:FSS) is the firm most likely to announce big dividend news, as an increased dividend is the logical next step in the company’s turnaround plan.