Impact & Expertise

Press Releases

  • May 17, 2011
  • Time for Companies to Stop Accumulating Cash and Start Using It to Create Shareholder Value, According to a Survey by The Boston Consulting Group

  • BCG Annual Investor Survey Suggests Investors Want Companies to Start Putting their Trillions in Cash into Organic Growth—or Return That Cash to Shareholders, Preferably in the Form of Dividends

BOSTON, May 17, 2011—In the aftermath of the global financial crisis, companies around the world have accumulated trillions of dollars in cash on their balance sheets. As far as investors are concerned, now is the time for companies to start using that cash to create shareholder value, according to a recent survey by The Boston Consulting Group. 

The BCG Investor Survey

During the first quarter of 2011, BCG surveyed 111 professional investors and sell-side equity analysts in Europe and the U.S. who, collectively, are responsible for nearly $1 trillion in assets under management and cover a wide range of industries and locations. The survey is the third in a series that BCG has conducted since 2009, probing investors’ views on the global economic environment and priorities for business value creation. Among the key findings

  • As the economy has improved, investors have grown increasingly bullish about the prospects of global equity markets. The percentage of respondents who said that they were “extremely bullish” or “bullish” about equity markets grew from 15 percent in 2009 to 53 percent in 2011.

  • Nevertheless, many foresee an extended period of below-average growth and total shareholder return (TSR). And concerns about broad macroeconomic trends have fed an undercurrent of doubt about the long-term prospects of the economy. For example, a large majority of the survey respondents—82 percent—are “somewhat concerned,” “very concerned,” or “extremely concerned” about the impact of high U.S. debt levels on equity markets.

  • In this improving—but still highly uncertain—environment, there has been a consistent “ return to quality.” Investors are interested in putting capital into companies with high-quality management teams, clear sources of competitive advantage, strong and sustainable free-cash flow, and credible long-term plans for delivering value through profitable growth.

  • Investors recognize, however, that in a period of slow GDP growth, many companies will not have strong growth prospects. As a result, free-cash-flow returns to shareholders are becoming an increasingly critical component of the investment thesis. Indeed, investors assume that cash returns will make up a relatively larger portion of TSR than in the recent past. And many want those returns in the form of dividends rather than share buybacks.

  • Given these priorities, it is more important than ever that public companies develop and communicate a clear and compelling investment thesis, in which an organization’s business, financial, and investor strategies are carefully aligned. Although, in recent years, investors have seen some improvement in investor communication, 65 percent of respondents said that the companies they follow are not well aligned across these three dimensions.


All That Cash

The findings of this year’s survey need to be understood in light of the fact that global corporations today are sitting on unprecedented amounts of cash.

“The global financial crisis inspired widespread concerns about liquidity, causing companies to begin hoarding cash,” said Jeff Kotzen, a senior partner in BCG’s New York office and lead author of the study. “This trend was accelerated by the many cost-cutting initiatives that companies pursued during the downturn to improve profitability in the tough economic environment. As a result, companies worldwide are showing trillions of dollars of cash on their balance sheets.”

In 2010, for example, total cash and equivalents at the nonfinancial companies in the S&P 500 were just over $1 trillion, representing approximately 10.9 percent of assets, on average, 14 percent of revenues, and 10.8 percent of market capitalization—the highest levels in two decades. When banks and the rest of the 9,500 U.S. public companies were included in the tally, the total amount of cash on hand was in the neighborhood of $9 trillion.

Responses to the BCG survey indicate that investors believe it is now time for companies to start putting that cash to work to create shareholder value. When asked how they wanted companies to use their excess cash, the top priority was, overwhelmingly, “organic investment” in profitable growth (selected by 79 percent of respondents) But if a company doesn’t have clear opportunities to invest in growth, investors want it to start returning its cash to its investors. “Accumulation of cash on the balance sheet” came in dead last on our list, chosen as a top priority by only 8 percent of respondents. By contrast, “dividend increase,” at 33 percent, was the third-highest priority on the list.

Investors also prefer dividends to share buybacks. “Stock repurchase program,” chosen as a top priority by only 19 percent of respondents, came in second to last. What explains this preference? The simple fact that the majority of respondents (68 percent) think companies do an extremely poor job of timing their share repurchases. “The strong preference of investors for dividends over buybacks helps explain why BCG research has consistently shown that dividend increases have a more positive impact on a company's valuation multiple than do share buybacks,” said Tim Nolan, a partner in BCG’s New York office and a coauthor of the study.

“Dividends’ growing importance to investors represents a major shift from attitudes in the past few decades, when capital appreciation accounted for the lion’s share of TSR,” added coauthor Frank Plaschke, a partner in BCG’s Munich office. During the past 25 years, dividend yield at S&P 500 companies accounted for only 2.5 percent of an average annual return of 9.9 percent. “But a higher reliance on dividends happens to be a reversion to a longer-term historical trend,” Plaschke continued. An analysis of the composition of TSR of the companies making up the S&P 500 from 1900 through 2010 shows that dividend yield accounted for nearly half of total TSR—4.6 percent of an average annual return of 9.5 percent.” 

To receive a copy of the article, All That Cash, which describes the chief survey findings or to arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About bcgperspectives.com

Bcgperspectives.com features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management’s agenda. It also provides unprecedented access to BCG’s extensive archive of thought leadership stretching back 50 years to the days of Bruce Henderson, the firm’s founder and one of the architects of modern management consulting. All of our content—including videos, podcasts, commentaries, and reports—can be accessed by PC, mobile, iPad, Facebook, Twitter and LinkedIn.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 81 offices in 45 countries.

Recent Releases

  • October 28, 2014 Tech and Telecom Firms Regain Lost Ground in Ranking of the World’s 50 Most Innovative Companies view full release
  • October 23, 2014 U.S. Executives Remain Bullish on American Manufacturing, Study Finds view full release
  • October 16, 2014 Telco IT Investments Continue to Rise as Outsourcing Tops One-Quarter of Total IT Spending view full release
  • October 13, 2014 Companies Must Unite the Employer, Corporate, and Product Experience into One Brand view full release
  • October 09, 2014 New BCG e-Book Explores the Rise of Shale Gas Through Multiple Lenses view full release
  • October 07, 2014 The Majority of Companies Are Bullish About the Prospects for ASEAN Economic Integration view full release
  • October 06, 2014 Nearly Two-Thirds of Workers Globally Say They Would Take Job Abroad, Study Finds view full release
  • September 25, 2014 Innovation Is the Key to Success in China’s Banking Industry view full release
  • September 25, 2014 Germany's Power-Sector Transformation Could Trigger the End of Market Liberalization, Both in Germany and Beyond view full release
  • September 22, 2014 Capital Markets Reward Divestitures with Higher Valuations view full release

Accelerating Out of the Great Recession

Accelerating Out of the Great RecessionThis book details what high-performing companies must do to seize advantage in a slow-growth environment. more

BCG Offices

Globe BCG has more than 80 offices around the world. Learn about our global presence.
Go

Social Impact

We are compelled to utilize our expertise to work with humanitarian organizations that impact local communities and the world at large. More