The stock market's 'best hope' this year is for companies to return some of their $7.1 trillion cash pile to investors, Bank of America says

• US corporations can save the stock market by returning some cash to investors, Bank of America said.
• The bank estimates US corporations have $7.1 trillion in liquid assets that can be returned to investors via dividends and buybacks.
• "Corporate debt levels are the lowest in decades, leaving ample room to calm nervous shareholders," Bank of America said.

US corporations can save the stock market by returning a big chunk of its $7.1 trillion cash pile to investors in the form of dividends and stock buybacks, Bank of America said in a note this week.

The S&P 500 is down more than 15% year-to-date, while the Nasdaq 100 is down nearly 30%, so investors are looking for any redeeming qualities to own stocks right now.

"The best hope for 2022 bulls lies in the ability of investors to dislodge the $7.1 trillion in idle US corporate cash," BofA said, noting that US corporations haven't been as friendly as they can be to shareholders over the past decade.

Stock buybacks and dividends from US businesses stand at 12-year lows, according to the bank, while 13% of S&P 500 firms have issued non-voting shares, leaving much of the control with top management. That's even as corporate debt levels hit their lowest level in decades, "leaving ample room to calm nervous shareholders," BofA said.

Until corporations get more friendly, "shareholders are going on strike," the note said, highlighting that the current decline represents the worst "buy the dip" market since 1974. "Investors want more payouts/pay-downs instead of capex for the first time since COVID, and BofA analysts care more than ever about free cash flow for payouts," BofA explained.

Management teams across the country might be taking BofA's advice, as recent actions suggest US corporations are willing to get more friendly with shareholders. Stock splits are on the rise, with Amazon, Alphabet, and Tesla as recent examples, and BofA's US equity team expects dividends to grow 13% this year.

"We expect that companies will face pressure to compete for shareholders by raising dividends and buybacks in the face of lower profit growth, falling productivity, and diminished prospects for profitable CAPEX," BofA said. 

Companies are also competing for talent in a tight labor market, and a falling stock price doesn't help with the retention of employees who have stock-based compensation.

"Firms defending their stock price can protect themselves from becoming takeover targets or from losing talent in one of the most adverse labor markets in history," BofA said. "If defending a business requires that [debt] leverage inches up from record lows, investors will likely view that as an attractive tradeoff."

To take advantage of the likelihood for increased payouts to shareholders from US corporations, BofA recommends investors buy ETFs that invest in companies that pay dividends, buyback their stock, and have a high free cash flow yield. That includes the SPDR S&P 500 High Dividend ETF and the Pacer US Cash Cows 100 ETF.

"High cash, low debt, limited voting, and low payouts...dividends have nowhere to go but up," BofA said.