US cash piles built on more than anxiety. Why are US companies sitting on so much cash rather than spending it?
By Sarah Gordon
Why are US companies sitting on so much cash rather than spending it?
Given the number of corporate bigwigs President Barack Obama has consulted in recent days – from Honeywell’s David Cote to Apple’s Tim Cook – the oft-mooted explanation of anxiety over the looming “fiscal cliff”, not to mention the still shaky global economy, seems credible
But a closer look at the numbers tells a rather different story.
It’s not clear, for a start, that companies are cutting back much on spending. True, business investment fell slightly in the third quarter. And the latest Business Roundtable Survey of US chief executives – which gathered views from 138 of the country’s leading company heads – found them to be gloomier about the economic outlook.
But it also found that, although nearly a fifth of CEOs expected their US capital expenditure to fall in the next six months, over half expected it be unchanged, and 30 per cent expected it to rise. Meanwhile, a National Federation of Independent Business survey in October found that small businesses were actually spending more, and planned to continue doing so over the next six months.
It is true that some large US corporates have announced they will be cutting back on capex. But these decisions tend to be for quite sector-specific reasons. Faced with record low natural gas prices, some natural resources companies are scaling back ambitious spending plans. But that has little to do with policy uncertainty, and more to do with the effects of the US shale gas boom.
Moreover, the idea that US companies are sitting on unusually large “war chests” of cash does not stand up to closer scrutiny. Gross cash balances are indeed high – $3.2tn at the 1,500 largest US listed companies, according to Morgan Stanley – but net cash balances are negative. And leverage, outside the banks, is roughly the same as at the start of the financial crisis. Net debt to equity, says BNP Paribas, is barely lower than it was in 2007.
The biggest 1,500 companies had $1.62tn of net debt in March 2012, almost the same absolute amount as in March 2006. This is not cause for concern – companies have refinanced their debt at lower interest rates, as well as extending its maturity. The proportion of companies with current assets greater than their short-term debt, says Morgan Stanley, is over 98 per cent, very high by historical standards.
But the data certainly don’t suggest that companies are unusually flush with cash.
The $3tn in gross cash holdings is also notably skewed to certain sectors. Nearly $1tn – a third – is held by technology companies, with healthcare and industrials accounting for just over another third between them.
Companies like Apple have always been stingy about spending the cash they generate. Apple has recently relented a little – vowing to return some of its $120bn-plus cash pile to investors in dividends and buybacks. But tech companies – for whom memories of the dotcom boom-to-bust are still fresh – have good reason to prefer a comfortable cash cushion.
Finally, Morgan Stanley estimates, well over half the $3tn is held overseas, by companies unwilling to stump up the tax penalty – up to 35 per cent – they would incur if they brought it home.
Which suggests that, if President Obama really wants to boost investment, a profit repatriation tax holiday would be a good start.
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