By Colin Kruger
Australian companies have been sitting on a cash pile of almost $40 billion, which is fuelling a spree of acquisitions, buybacks and also record dividends in what is expected to be a bumper earnings season.
According to Morgan Stanley, more and more companies are unwinding capital buffers built up during the pandemic, which had led to $40 billion worth of capital being raised since March last year.
There has been a spate of merger and acquisition activity in the past few months with Seven Group’s $8.8 billion successful bid for Boral, Wesfarmers $687 million offer for Australian Pharmaceutical Industries, an opportunistic $22 billion play for Sydney Airport, which the company has rejected, and a $3.4 billion takeover bid for telco Vocus. The activity remains below pre-pandemic levels but is expected to accelerate in the second half of the year.
“There’s been a significant build up of excess capital that a lot of companies are now sitting on,” said Alex Dignam head of equity capital markets for UBS Australasia. “There’s been a lot of activity in M&A, but for companies that don’t have obvious acquisition or growth opportunities, I think there will be an expectation from investors that dividends are at a minimum restored to pre-COVID-19 level ...[or] return that excess capital in the form of a buyback or special dividends.”
Last week, Rio Tinto announced a record $US9.1 billion in dividends , while National Australia Bank revealed a $2.5 billion share buyback.
Bell Potter’s Hugh Robertson said he expected more takeover activity in the next six months with growing interest from US companies. “I think the M&A activity is probably only just beginning.”
Cheap interest rates and businesses weakened from COVID-19 are other reasons behind the rise in M&A deals.
Morgan Stanley said giving cash back would be welcomed by investors at a time when the profit outlook for companies could be tempered by the economic uncertainty created by the outbreak of the Delta strain of COVID-19 in Australia .
UBS’s Mr Dignam said capital returns will be the big focus for investors during earnings season, followed by company outlook statements and any signs of inflation.
Bell Potter’s Robertson is not in favour of company’s pursuing buybacks. “Buybacks are normally an admission that you can’t do anything else with the money,” he said.
It’s a view shared by E&P’s Matthew Wilson. “A buyback recognises limited growth options, or reluctance to pursue them.”
Still, Airlie Australian Share Fund’s portfolio manager Emma Fisher expects that buybacks will ramp up. “The next 12 months is going to be one of significant capital returns in the Aussie market,” she said.
Airlie’s Emma Fisher expects to see significant cash returns over the next 12 months. Credit: Dominic Lorrimer
One of the biggest cash hoards expected to be unleashed is from building products company Boral, which relented to shareholder pressure and raised billions by selling off struggling overseas operations to focus on its domestic business.
It is now controlled by Kerry Stokes’ Seven Group, and Boral’s cash return will help Seven Group pay for its takeover bid.
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