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2012: Deploy It or Return It

Despite the limping economy, corporate balance sheets hold record levels of cash, and interest rates promise to remain low through 2012. Thanks to weakening stock prices, this scenario behooves a “deploy it or return it” mentality from shareholders according to a mergers & acquisition specialist at JP Morgan in a recent cnnMoney article. Thus in 2012 we may see an increase in share buybacks, dividend enhancements, and merger/acquisition activity as a means of generating higher returns to shareholders.

 

[CLICK HERE to read “Merger 2012: The year of the hostile takeover;” cnnMoney.com December 30, 2011.]

Bonds

As corporations look to invest capital they will look to credit vehicles to do so. In today’s environment, coupon yields provide reliable income and are further up the food chain in terms of capital structure – they also tend to offer significantly higher payouts.

The decision to buy individual bonds or bond funds has a lot to do with your investable net worth. Buying individual bonds requires a higher investment, but the larger the portfolio of individual bonds, the lower the overall cost. However, bond funds offer a viable alternative for investors with fewer assets available for their bond allocation.

[CLICK HERE to read “Corporate bond returns fall short of Treasurys” at MarketWatch.com; December 29, 2011.]

Retail

With earnings growth slowing down, the retail sector will need to do something to attract investors. That something, according to independent retail analyst Brian Sozzi, includes share buybacks and targeted capital investment – such as toward online operations. According to Sozzi, we’re more likely to see what he calls “larger, boring brands” deploying their cash via share buybacks and higher dividends. Companies like Macy’s, Kohls, Home Depot and Gap are all cash flush and pulling back on new store openings, which means they need to look at other ways to improve their return profile.  

[CLICK HERE to view the video report from Bloomberg.com, “Sozzi Sees Some Retailer Dividends, Buybacks;” December 29, 2011.]

Banks

Caution remains for the bank sector. In November, the Federal Reserve published its complete ruling that requires banks with assets of $50 billion or more to submit annual capital plans for the Fed’s review. That includes any plans for capital distributions, including dividend payments or stock repurchases. According to its press release, the purpose of the review is to “ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress.”

So far the Fed has denied requests from both Bank of America and MetLife Bank to increase dividend payouts to shareholders, subsequently leading to MetLife’s recent announcement that it intends to sell its bank depository business to GE Capital.

[CLICK HERE to read the Federal Reserve’s press release for their Comprehensive Capital Analysis and Review (CCAR) stress test in 2012; November 22, 2011.]

[CLICK HERE to read “MetLife Ditches Bank Business, Sells $7.5B In Deposits To GE Capital;” at Forbes.com; December 27, 2011.]

If you’re considering adding some income-yielding investments to your portfolio in 2012, give us a call for analyses and recommendations.

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