Get bigger or pay money to shareholders – the choice facing companies
Analysts are divided on whether companies should return cash to shareholders or keep growing through acquisitions and development.
It has been a great time to be a shareholder with Australian companies increasingly stuffed with cash which they will now be looking to put to use.
Those shareholders may selfishly hope that a lot of that cash will be heading in their direction – either in the form of bumper dividends or share buybacks – but the other big choice for companies is to look around for mergers and acquisitions.
Already there have been plenty of signs that takeover activity is on the rise after a bit of a hibernation during the pandemic, with Kerry Stokes-chaired Seven Group’s (ASX: SVW) opportunistic move on building products group Boral (ASX: BLD) being an obvious example.
Seven will be able to partly pay for their bid
It is also one of those rare moves in which the acquirer will almost certainly be able to finance their bid with the cash within the target, given that Boral is stuffed with cash after selling off much of its US operations for $2.9 billion.
Shareholders – the biggest one being Seven – are now in line to scoop up the proceeds through dividends – regular and special – and/or a share buyback.
There have been other indications that companies and even superannuation funds are searching for acquisitions, with the opportunistic but quickly rejected $22 billion play for Sydney Airport (ASX: SYD).
Bids starting to mount
Wesfarmers (ASX: WES) also made a $687 million offer for Australian Pharmaceutical Industries (ASX: API) which owns the Priceline group of pharmacies.
That bid has been rejected for now but with large API shareholder Washington H Soul Pattinson a supporter, it would not be a surprise if the Perth conglomerate eventually gets control.
Perennial target telco group Vocus Group (ASX: VOC) has also been the target of a $3.4 billion bid from Macquarie Infrastructure and Real Assets (MIRA) and after three bids in as many years, this time the company might actually change hands.
Hidden value might be exposed
Any one of these bids also brings with it the chance that it will highlight otherwise hidden value in sectors of the share market that have not been touched recently by corporate activity.
For example, if Wesfarmers does grab API, that has the potential to highlight the value in other pharmacy and drug distribution groups such as Sigma (ASX: SIG), which has pharmacy chains including Amcal, Guardian and Chemist King or the New Zealand – based EBOS Group (ASX: EBO), which has drug distribution and pet food businesses as well as pharmacies.
Until now, the ownership of pharmacies has been fairly strictly controlled by the Pharmacy Guild which has been supported by the federal government but if general retail groups such as Wesfarmers do open the door a crack, others are likely to follow.
Banks and miners stuffed with cash
As an example of the sort of massive cash hoards that are being built up within companies, all of the major banks are sitting on excess capital and Rio Tinto’s (ASX: RIO) interim dividend came in at a massive $12 billion.
That massive dividend is the sort that divides analysts, with some urging companies to keep growing through acquisition and development rather than returning cash to shareholders.
Some say Rio’s massive dividend is the first time the big miners have shown some discipline instead of blowing the proceeds of a mining boom through buying mineral deposits or other companies at the top of the market.
Show me the money or growth
Others would much rather see the cash retained and used to keep plenty of growth options for the future.
They see share buybacks as a concession of defeat because there is nothing else to do with the money except to reduce the numbers of shares on issue.
Whichever camp you belong to, it seems certain that more companies will be on the merger and acquisition trail on the hunt for opportunities thrown up by the pandemic even as others return cash to shareholders through extra dividends and share buybacks.
Either way, there are lots of opportunities for shareholders to snap up shares in companies that are potential acquisitions with their extra dividends or simply use the extra cash for other purposes.