The depth of the economic recession has caused many consumers to save more and spend less, threatening a potential recovery. What has some people more concerned, however, is the fact that businesses have ramped up their savings to historic proportions.
According to The Wall Street Journal, cash holdings among the top 500 companies in the U.S. have risen to nearly $1 trillion, even excluding financial companies that routinely have huge cash balance sheets. Throughout the economy, in a wide range of different sectors, you can find companies that are putting cash aside at an impressive rate. Here's a sampling:
|
Company
|
Cash and Short-Term Investments, Most Recent Quarter
|
Change in Cash and Short-Term Investments Over Past 4 Quarters
|
|
Google (Nasdaq: GOOG )
|
$22.0 billion
|
53%
|
|
Oracle (Nasdaq: ORCL )
|
$20.6 billion
|
58%
|
|
WellPoint (NYSE: WLP )
|
$18.2 billion
|
237%
|
|
Amgen (Nasdaq: AMGN )
|
$14.0 billion
|
44%
|
|
AT&T (NYSE: T )
|
$6.2 billion
|
287%
|
|
PepsiCo (NYSE: PEP )
|
$3.5 billion
|
86%
|
|
UPS (NYSE: UPS )
|
$3.3 billion
|
90%
|
Source: Capital IQ, a division of Standard & Poor's. Figures use most recently available quarterly financials.
Overall, the Journal estimates that cash holdings among all 500 companies have risen by about 17% in the past year.
Given the stresses in the financial markets during 2008 and 2009, it's no surprise that corporate managers battened down the hatches to try to survive whatever the economy might throw at them in the future. The main question, though, is whether these high levels of cash on balance sheets are good or bad for shareholders.
The color of money
Companies' holding large amounts of cash inspires heated debate. In some people's eyes, there's little reason for companies to hold cash at all; if a company generates strong cash flow, then the right thing to do is to return that wealth to shareholders, typically either by paying dividends or through stock buybacks. That way, the argument goes, different investors are free to do whatever they want to with the money.
Yet the success of corporate leaders like Warren Buffett in both saving and deploying cash reserves at the best times leads to a completely different view. Although few would argue that holding cash for its own sake is smart -- especially at the ridiculously low interest rates you see today -- there's value in having the flexibility to pursue whatever potentially profitable options present themselves. In other words, cash is only as valuable as what you do with it, but many companies appear to be preparing to do quite a bit with their cash hoards.
Actions speak louder than words
But how do you know whether a company that's hoarding cash will do the right thing with it? After all, any company can collect a stash of money simply by cutting the amount it reinvests into its own business. That can be exactly the wrong move if that business is growing quickly and generating better returns than you'd get from other investments or from the cash holdings themselves.
On the other hand, cash is definitely a positive sign for companies that have demonstrated a history of the following moves:
- Timely investments. Just as stocks rise and fall, prospective corporate investments are better values at some times than at others. The willingness to make an acquisition isn't any big deal by itself, but the ability to do so at the best time for the buyer sets a company apart from its peers.
- Smart acquisitions. Many mergers fail to produce the benefits that the buying company hoped to achieve. Unrealistic expectations, differences in corporate culture, and unforeseen complications can all combine to make a buyout look stupid in hindsight. Before giving a company credit for its cash hoard, evaluate whether it has been smart with its cash in the past.
- Shareholder friendliness. Smart cash management also includes determining when to give money back to your investors. But you want to be smart about it, buying back shares only when they present a good value, and paying dividends when it makes more sense.
On the whole, much of the cash that companies have saved will likely get spent at some point. When it does, it could provide a strong push to the economic recovery -- and the companies' own stock prices, if they spend it wisely. Until conditions get clearly better, though, shareholders are likely to put up with high cash levels without too much complaint -- at least as long as the financial markets remain on edge.
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