A study put out by Deloitte of Bloomberg data points to the continued growth of the cash balances on major corporate balance sheets.
Anousha Sakoui reviews this study in the Financial Times: "In 2008, the non-financial members of global S&P 1200 index-975 of the world's biggest companies-had a total of $1.95 trillion in cash. But by the end of 2012, that level had jumped 62 percent to $3.2 trillion as a result of companies hoarding cash ..."
This number has continued to increase through 2013. An interesting aspect of this accumulation is that companies that "held more than $2.5 billion each in cash and near cash items" held 82 percent of the total held by these companies, up from 76 percent in 2007, "at the start of the credit crisis."
Even more interesting is the fact that in the middle of last year, "just six companies - Apple (AAPL), Microsoft (MSFT), Google (GOOG), Cisco (CSCO), Oracle (ORCL) and Qualcomm (QCOM) - held more than a quarter of the $1.5 trillion held by US non-financial corporations." This is according to Moody's and reported by Richard Waters also in the Financial Times. Waters writes that Apple, alone, was sitting on close to $150 billion.
This is not really new information. I have been writing about the big cash balances that many healthy US corporations had built up for at least four years. The early betting was that these healthy corporations were just poised to gather up some less healthy organizations that were just ripe for being taken over.
This early M&A binge never took place. One of the major reasons given for the failure of this burst of M&A activity was the uncertainty of the business climate. Corporations were uncertain about the business policies of the Obama administration.
This uncertainty was coupled with the fact that a large part of the cash balances were held offshore-for example a very large portion of the tech cash is held offshore-due to tax avoidance strategies. Rather than bring these monies back to the states, companies preferred to wait-and lobby Washington-to get a break on the taxes.
Furthermore, the companies holding these cash balances did not want to go into physical capital investment, especially given the uncertainty that was rampant in the economy during this time. And, the economy was different in the current recovery. Another study reported in a January 2014 Deloitte release showed that in 2010 only 15 percent of the source of corporate value creation came from tangible assets, the other 85 percent was associated with intangible assets. The study reported that in 1982, 60 percent of corporate value creation came from tangible assets. Recoveries are not connected with what they once were.
As time passed, more and more pressure was exerted on corporations to either buy back their own stock or to increase dividend payments. Stock buybacks and cash dividends increased.
Still, the buildup of cash balances continued.
Some of the cash hoarding came from the new issue of debt. Corporations took advantage of the extraordinarily low interest rates to issue debt. Some companies, like Microsoft, never had issued long-term debt before. The belief was that Microsoft was going to take advantage of the environment and buy its future.
But, these funds have not been used. Here we can pick on Microsoft again and its retiring CEO Steve Ballmer. I have written many times about the concern that Ballmer never made very good use of the cash flows generated by Microsoft. (My latest effort on this can be found here.) And, then Ballmer goes on and proceeds to issue a series of debt issues to raise even more cash.
The fact that the price of Microsoft stock has basically flat-lined in the 2000s up to the present time seems to indicate that investors don't particularly like the way that Ballmer and Microsoft have used their retained earnings… and debt issues. And, that may be the main reason that Ballmer is out of Microsoft.
But, Mr. Sakoui, in the first article mentioned above, presents evidence that seems to back up this investor preference. He writes "Deloitte's analysis of the S&P 1200 and FTSE 100 suggests that cash-rich companies have been underperforming those with relatively small cash piles since 2008 measured either by their quarterly revenue growth or share price performance." Companies with low cash balances have done better on both measures than companies with large cash reserves.
Sakoui goes on to report, "Of the S&P 1200 non-financial companies, as of the third quarter 2013, technology companies held the most cash ($775 billion in total), followed by telecoms, then energy and healthcare."
A big question mark for the future concerns whether or not large corporations will begin to increase their capital expenditures in the future. Quite a few analysts believe that they will… but they have felt this way before in this recovery. In addition, analysts have viewed the early M&A activity in January as a sign that 2014 will be a boom year for acquisitions... but they have felt this way before in this recovery.
There are several areas to watch here. First, business confidence seems to be picking up and some of this is attributed to a feeling that uncertainty is not as great as it once was. Second, there is the question of just how much the nature of investment has changed. Intangible assets just are not as "finance" intensive as are tangible assets. If the makeup of investment in assets has changed significantly as is indicated in the Deloitte study mentioned above, new corporate investment might not have as big of a multiplier effect on the economy as it did before.
Furthermore, there may need to be a change in the investment behavior of the leaders of the tech industry. Waters refers to the "habit of hoarding" in the tech industry "caused partly by an innate conservatism in a sector where fortunes can reverse quickly." He mentions how Steve Jobs had a brush with bankruptcy and was reluctant to pay out any dividends or buybacks "even though Apple generated $55 billion in free cash flow in his final three years at the helm."
And, there is the prospect of rising long-term interest rates, which will change quite a bit of behavior in the long-term end of the capital markets.
One could argue that this whole dilemma has been created by something that could be called a "liquidity trap." The Federal Reserve has pumped out billions and billions of dollars into the financial markets and it is not getting spent on investments to spur on the economy. Officials at the Fed seem to keep believing that one day… obviously, they don't know when… that the spigots connected to all this cash will be opened.
Certainly, investors are not rewarding those companies that seem to be holding excessive cash balances. Maybe one of these days the people that run these large corporations will listen to their shareholders who believe that they deserve to experience a higher stock price and reduce their cash balances one way or another. That is, rather than hold on to it themselves, they will distribute the money in some form to others that might have a better use for it.