Companies Start Mad Cash Grab on Dow Highs

Posted by - Thursday, March 7th, 2013

U.S. companies are taking advantage of the Dow's record highs.

The Dow Jones Industrial Average rose past its previous highs on Tuesday, Wednesday, and again today, and investors are liking the looks of it. And companies have decided to use that optimism to raise cash in one of two ways.

Many companies have taken to secondary stock offerings. Since the start of the year, according to the Wall Street Journal, cash raised through secondary offerings has totaled $35.1 billion, the most to-date since 2000.

Secondary Offerings 2013 Chart
Source: Wall Street Journal

This is a sign that these companies are able to continue to grow, perhaps looking to fund acquisitions or expansion with the cash they raise.

Of course, secondary offerings aren't always bullish. A number of companies have seen private-equity firms selling down stakes, moving out of the company. But these have only made up a quarter of these sales so far this year—the smallest percentage since 2010, the Wall Street Journal reports.

And according to a study by Jay Ritter of the University of Florida, companies that provide secondary offerings have historically performed better than their peers for the six months following the offering.

KB Home (NYSE: KBH), for example, had a secondary stock offering in January, its first since its IPO. And though it was trading at a 52-week high at the time of the offering, according to the Wall Street Journal, it has grown 14% since. The stock is up over 23% so far this year.

Larger companies, meanwhile, have been selling large bond issues to raise cash amid the Dow highs.

Burlington Northern Santa Fe, the railroad company owned by Warren Buffett's Berkshire Hathaway (NYSE: BRK.A), sold 10- and 30-year bonds to borrow $1.5 billion. In total, issuance from five companies borrowing from investors on Tuesday was $5.9 billion.

From Fox Business:

“Demand is robust across investment-grade issuance today,” said Sean Simko, head of global fixed-income management at SEI Investments Co. [on Tuesday] He said investors were seeking corporate bonds because their extra yields--or so-called “spread”--over U.S. Treasurys are likely to compress on signs of an improving economy.

The new highs for the Dow could encourage companies to expand. And though these highs are likely an artificial result of the Fed's monetary policy, the acquisitions, company growth, and investment that occurs as a result is very real.


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