Buy On Cash Returns, M&A, Sell On Buybacks

Buy On Cash Returns, M&A, Sell On Buybacks

We’re now more than halfway through 2015, and some interesting trends are emerging. Investors seem to be drawn to companies offering strong cash returns. They also favor companies on the acquiring end of M&As but are shunning many companies offering share buybacks or which have bad balance sheets.

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Goldman Sachs analyst Robert Boroujerdi and his team released the latest edition of their Portfolio Manager Toolkit on Monday, highlighting these four trends.

Amazon wins with cash returns

They learned that companies with cash returns as a factor in their stocks are on track to outperform others this year. Cash returns also impacted the second half of last year, boosting companies offering cash returns then as well (All graphs/ charts in this article are courtesy Goldman Sachs.).

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The two drivers they see in this area are improving asset productivity and efficiently spending capital. Gross profitability has also been a strong alpha generator for Russell 1000 stocks:

Cash returns

Here's a look at the companies Boroujerdi and team say are benefiting from their cash strategies:

Cash returns

Buybacks… not so much

Interestingly, they report that companies offering share buybacks haven't been doing so well this year. The trend comes as spending on buybacks among Russell 1000 companies surged last year. In fact, last year marked the first year since 2007 that companies spent more on buybacks than they did on capital expenditures.

Cash returns

However, it seems as if investors are tiring of buying stocks based on buybacks, based upon the S&P 500 Buyback Index:

Cash returns

Apple falls into this camp, and you may remember that activist investor Carl Icahn had been pushing for greater and greater share buybacks. There was debate about whether this strategy would boost Apple shares, and the Goldman Sachs team includes the company in a list of those which "have struck a better balance" in terms of allocating large amounts of capital to share buybacks.

Cash returns

At one end of the spectrum, they report that Caterpillar and IBM are among the companies which have actually lost money on their share buybacks this year.

Cash returns

On the other, they think Sirius XM, Dollar General, MasterCard and Starbucks have missed opportunities to buy back some of their shares.

Cash returns

M&As for the win

The Goldman Sachs team also found that shares of acquiring companies have been outperforming this year as well. Following announced deals, they discovered about a 65% hit rate not counting the Energy sector. They call this a "marked change cycle over cycle," pointing out that corporations still have a total of $2.1 trillion in balance sheet capacity to do more M&A deals.

Cash returns

Further, they say debt issuance in the U.S. is heading for $1 trillion this year, which would be a 45% increase compared to last year. Of that amount, 36% of the usage is for M&As. Healthcare M&As are leading the way.

Cash returns

Bad balance sheets weigh on share prices

While companies have been issuing debt like mad on the back of low interest rates, all that credit is starting to affect their share prices because their balance sheets are weakening. Credit spreads are widening, resulting in pressure on "highly levered" companies. In just the last couple of weeks, companies with weak balance sheets have seen a relative drawdown of 250 basis points. This year to date, the drawdown is about 500 basis points.

Cash returns

The companies on Goldman Sachs' balance sheet risk list include Advanced Micro Devices and Boyd Gaming.

Cash returns


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Michelle Jones is editor-in-chief for and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at
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