A Mountain of Corporate Cash

Comments Off on A Mountain of Corporate Cash
A Mountain of Corporate Cash

The Federal Reserve estimates American non-financial corporations are sitting on $1.84 trillion in cash.1  According to Tradersnarrative.com, that means that these companies now hold a higher percentage of their assets in the form of cash and equivalents than at any time since the 1960s. What are they doing with this cash, right now? 

  • First and foremost, they are buying back their own stock at a pace not seen since 2007; that's helping to boost the stock market. 
  • Second, as Barron's2 reported in a recent cover story, they are starting to pay large dividends to their shareholders. 
  • Third, they are starting to hire more employees and to bulk up their capital expenditures in preparation for healthier economic times.
  • Fourth, some companies are using their cash to take advantage of the depressed valuations of many other corporations, and they are seeing opportunities for mergers and acquisitions at bargain prices. 

All of these activities will be good for business and the broader economy. 

As a team of analysts at Credit Suisse recently put it, "Survival mode is over."  American companies are poised to come out of the "enforced hibernation" brought on by the recession. 

So, why is there so much cash on hand today, and why are companies just now getting ready to spend it? 

Normally, cash on hand and capital expenditures tend to move together and to maintain a fairly constant ratio to each other.  Sometimes this diverges, as it did during the tech boom of the 1990s, when leveraged spending surged to $300 billion, putting the two numbers out of sync.  More recently, during this recession, the opposite was the case; for several quarters, capital spending all but vanished. 

But, finally, capital spending and hiring are beginning to return to normal.  For example, IBM recently predicted an uptick in corporate spending for IT equipment.  Meanwhile, Cisco and Intel both announced a brisk round of new hiring.  At the bottom of the recession, payout of dividends on stocks was down 20 percent, and stock buybacks were barely detectible.  But recently, they've been on the upswing.

Similarly, mergers and acquisitions volume has been well below average.  The financial concept of "reversion to the mean" tells us that these deviations can't last.  Currently, M&A activity, dividends, and buybacks are all up slightly.  ExxonMobil is trying to buy XTO Energy, while Hewlett-Packard is acquiring Palm. 

But there's a deeper meaning buried under the mountain of corporate cash...

To continue reading, become a paid subscriber for full access.
Already a Trends Magazine subscriber? Login for full access now.

Subscribe for as low as $195/year

  • Get 12 months of Trends that will impact your business and your life
  • Gain access to the entire Trends Research Library
  • Optional Trends monthly CDs in addition to your On-Line access
  • Receive our exclusive "Trends Investor Forecast 2015" as a free online gift
  • If you do not like what you see, you can cancel anytime and receive a 100% full refund