Corporate America sits on cash hoard
Joanna Slater
New York — Globe and Mail Update Published on Sunday, Jul. 04, 2010 8:05PM EDT Last updated on Monday, Jul. 05, 2010 10:43AM EDT
For a clue to Corporate America’s state of mind, look no further than the piles of money stashed under its mattress.
Facing an uncertain economic environment, U.S. firms have socked away cash at a rapid clip, amassing a rainy-day fund the likes of which hasn’t been seen in over 40 years.
At the end of March, non-financial firms had accumulated a record $1.84-trillion (U.S.) in cash and other liquid assets on their balance sheets, according to the latest figures from the U.S. Federal Reserve Board. As a percentage of total company assets, which include factories and other investments, cash is at its highest level since the early 1960s.
When and where companies decide to use their stockpile will be a key factor in the strength of the recovery. If companies feel confident enough to invest in new equipment or make acquisitions, it will spur economic activity and hiring. If they remain anxious, such decisions will be delayed, dampening overall growth.
Such hoarding can’t go on forever. Companies that keep piles of cash sitting in the bank earning razor-thin interest rates will eventually face the ire of investors, who will demand that the money be put to better use or returned to shareholders. Two options: paying higher dividends or buying back shares.
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The levels of cash are rapidly becoming too much of a good thing, one investment bank argued recently. Cash-rich U.S. companies are like seals bulking up their blubber, noted a report from Credit Suisse. Such fat protects the animal during a harsh winter, but quickly becomes a nuisance in warmer weather, analysts wrote.
The real question for U.S. companies is what business climate lies ahead. Recent data suggest that economic growth in the United States is slowing markedly. If firms “weren’t nervous last quarter, they’re nervous now,” says Howard Silverblatt, a senior analyst at Standard & Poor’s who tracks the firm’s trademark stock index.
U.S. companies are holding an “amazing amount of cash, considering if they’re lucky they’re getting a per cent [interest] on it,” he says. “When they start spending, get out of the way.”
The stores of cash are the result of drastic cost-cutting during the recession, followed by a slow recovery in the economy, which pumped up profits. Unlike U.S. households and the U.S. government, the corporate sector has not borrowed heavily, giving it an enviably healthy balance sheet.
Companies hoard cash for much the same reasons individuals do – it gives them access to money at a moment’s notice, without having to take out a loan or sell something to generate funds. In exchange, they earn very little interest on their stockpile.
Even so, executives may be reluctant to part with their financial blubber. During the crisis, many firms had the harrowing experience of seeing the bread-and-butter loans they relied on to meet monthly expenses suddenly dry up. People have been “a little bit scarred by effectively being cut off from short-term funding,” says Douglas Cliggott, chief equity strategist at Credit Suisse.
A quick scan of recent earnings reports shows how much companies are squirrelling away. In early June, La-Z-Boy (LZB-N) the iconic armchair maker, said that cash on the company’s balance sheet shot up to $108-million at the end of its latest quarter, up from just $17-million a year earlier. “We have managed our balance sheet aggressively,” said Kurt Darrow, the company’s CEO. “Financial flexibility remains of paramount importance to our company.”
A week later, Darden (DRI-N) home to the Red Lobster and Olive Garden chains, announced that its cash holdings quadrupled to $249-million in the year to May. On a conference call with analysts, the firm’s CFO delicately noted that the cash was “more than we typically have.” Indeed, the company has never had anywhere near this much on hand in its history.
The cash will be used to pay down debt coming due, open new restaurants, and remodel existing ones, a company spokesman said. It’s also looking at increasing its dividend and pumping up its purchases of company stock, two ways to transfer cash to shareholders.
Certain cash-heavy sectors are poised to see an increase in mergers and acquisitions, according to Credit Suisse, including technology, health care, and basic materials. Spending on physical assets like buildings or machinery will also increase, it predicted, but cautiously.
U.S. companies are aware that the time is coming soon where they’ll have to put their carefully hoarded stashes to work. Last month, Smithfield Foods Inc., a pork and turkey giant, acknowledged as much.
“We remain respectful that we are carrying expensive cash,” its chief financial officer, Robert Manly, said on a conference call. The firm more than tripled its cash on hand in the year to May. With certain risks behind the company, Mr. Manly said, “We can turn available cash to better uses.” |
