Recs

9

Is This Why Companies Kept So Much Cash?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

It's amazing how a day can change everything. Until now, investors seemed convinced that Congress would come to a resolution about raising the debt ceiling and preventing the U.S. from defaulting on its debt. But yesterday, investors finally flinched -- and started thinking about the ramifications that even getting this close to a default could have not just on the government but also on U.S. businesses for years to come.

Yet in light of current events, the moves that many companies made in the aftermath of the financial crisis three years ago to raise cash now look incredibly smart. Although cash-rich companies have taken a lot of criticism from shareholders wanting them to deploy their financial resources more productively, any disruption in the credit markets resulting from a default will make them glad that those companies took the steps they did.

Getting ready
Now that deadlines are fast approaching without any apparent progress toward an agreement, corporate financial executives are scurrying to prepare themselves for what could happen next. Yesterday, The Wall Street Journal reported how companies such as Ford (NYSE: F  ) , FMC (NYSE: FMC  ) , and Eaton (NYSE: ETN  ) have taken steps to ensure that they have the liquidity on hand to avoid any business disruptions.

With many continuing to believe that lawmakers will avoid default, these moves may seem unnecessary. But the Treasury market itself is handicapping the prospects for default -- and assigning a definite probability of a temporary disruption. Yesterday, rates on Treasury bills maturing on Aug. 4 -- the first maturity after the deadline set by Treasury officials for raising the debt ceiling -- quadrupled. Meanwhile, rates on T-bills maturing in late September stayed relatively flat, suggesting that everyone believes any crisis will end by then.

Of course, the bigger question for companies is what impact the debt crisis would have on the economic recovery. For instance, Ford has long sought to improve its credit rating to investment grade, but a fallback into recession could easily derail those plans.

An end to capital-raising
Another thing to keep in mind is that cash-rich companies could actually benefit from plummeting stock markets following a default. At the very least, falling share prices could lead Apple and Oracle (Nasdaq: ORCL  ) to take advantage by implementing or adding to share-buyback programs. It could also help those and other companies with potential acquisition plans to pick up target companies more cheaply.

Those potential benefits help explain some recent moves that confused many investors. Over the past year, a host of companies, including top credit-quality issuers like Johnson & Johnson (NYSE: JNJ  ) and IBM (NYSE: IBM  ) , have issued new bonds to raise capital. Although some of these companies had immediate needs for the money they raised, both J&J and IBM have impressive amounts of cash on their balance sheets already and didn't appear to have any true need for the money.

Yet looking back, taking advantage of the opportunity to lock in low rates while they lasted could have been a stroke of genius. Although the companies may simply have intended to beat a coming gentle rise in interest rates whenever the Fed decided to tighten monetary policy, the potentially much more severe consequences of a U.S. default could clog the credit markets indefinitely and ratchet up borrowing costs for those companies that failed to get in while the getting was good.

Planning for contingencies
Uninvested cash always seems like a waste of financial resources during good times. But whether you're talking about a company keeping some extra cash on hand or the cash allocation in your own investment portfolio, the true value of keeping spare cash becomes clear only when a crisis hits. That's why having an emergency fund for your own finances is a key part of your financial security -- and why you should cut companies some slack for keeping enough money to handle the ever-increasing risks in the global economy.

Smart capital management is a key part of what makes a winning stock. To learn about five stocks that the Motley Fool owns in its own portfolio, click on the link and read our free special report on investments we think should be among your holdings as well.

Fool contributor Dan Caplinger doesn't have a cash stash under the mattress, but he likes having dry ammo ready. You can follow him on Twitter. He doesn't own shares of the companies mentioned. The Motley Fool owns shares of Johnson & Johnson, Ford, Apple, and Oracle. Motley Fool newsletter services have recommended buying shares of Ford, Johnson & Johnson, and Apple; creating a bull call spread position on Apple; and creating a diagonal call position on Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policykeeps an extra $20 in its wallet just in case.


Read/Post Comments (1) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1527545, ~/Articles/ArticleHandler.aspx, 10/24/2014 9:00:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,677.90 216.58 0.00%
S&P 500 1,950.82 23.71 0.00%
NASD 4,452.79 69.95 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/23/2014 4:02 PM
ETN $62.74 Up +1.64 +0.00%
Eaton Corp CAPS Rating: ****
F $14.40 Up +0.27 +0.00%
Ford CAPS Rating: ****
FMC $58.18 Down -0.27 +0.00%
FMC Corp CAPS Rating: ****
IBM $162.18 Up +0.39 +0.00%
International Busi… CAPS Rating: ****
JNJ $102.63 Up +1.41 +0.00%
Johnson & Johnson CAPS Rating: ****
ORCL $38.23 Up +0.59 +0.00%
Oracle CAPS Rating: ****

Advertisement