Hoarders: Corporate America Edition

Here's some blunt force irony for everyone struggling in unemployment and barely making ends meet: Corporate America has more money than it knows what to do with. As profitability hits record highs at a time when hiring and investment is eschewed, cash on balance sheets has never been higher.

New data from Standard & Poor's shows how fierce this phenomenon has become. Here's total cash balances for S&P Industrials, which is the S&P 500 Index minus financials, utilities, and transportation companies (because they tend to always carry high cash balances):

This is serious stuff. Cash among these companies is about one-quarter of a trillion dollars higher than it was 36 months ago. That's almost two percent of GDP. If you want a simple explanation for why the economy is going nowhere fast, this chart is a good place to start. Corporations have chosen hoarding over progress.

Another way S&P breaks out this data is cash as a percentage of market cap. Here are the most glaring examples of cash overload:

Company

Cash as a Percentage of Market Cap

Dell (Nasdaq: DELL  )

59.85%

Cisco (Nasdaq: CSCO  )

33.85%

Amgen (Nasdaq: AMGN  )

27.89%

Google (Nasdaq: GOOG  )

26.08%

Microsoft (Nasdaq: MSFT  )

20.10%

Makes you think about what you're actually getting when buying shares of these companies. In a way, they're almost publicly traded bank accounts. When you buy a share of Dell, most of what you're getting is cash in the bank, with a little bit of computer company on the side.

But there's a twist to this story. Among S&P Industrials companies, the increase in cash has been accompanied by an increase in debt:

Note the two lines in this chart are on separate Y-axis, so their levels shouldn't be compared to each other. But what it shows is important: cash balances have risen, but the increase in cash as a percentage of long-term debt is less impressive. In more exact terms, cash balances increased 40% since mid-2007, while cash as a percentage of long-term debt only increased 18%. Part of the increase in cash, therefore, came from taking out more debt. Sure enough, nonfinancial corporate debt is up over $1 trillion since 2007 to a new all-time high, according to the Federal Reserve.

Is that a bad thing? Not for some companies. There's a rush right now to take advantage of a bond market that seems to have lost its mind, allowing companies to raise cash at almost zero cost. Microsoft, for example, just sold debt at yields below 1% in order to finance dividends and share repurchases. While this doesn't constitute cash hoarding, it's an example of a company going into debt because it wants to, not because it needs to. That type of cash use is wholly rational and should benefit shareholders a great deal.

But it's the exception. On a broader scale, the danger is that companies end up using record cash hoards for stupid investments and delusions of grandeur. There are only a few things companies can do with cash: invest it in the business (either through hiring or capital investments), buy another company, give it back to shareholders, or pay off debt. History shows option number two -- buyouts -- attracts CEOs like gnats to bright lights. Part of this, as one Motley Fool colleague recently noted, is because "There is almost a perfect correlation between the size of a company and management compensation." However, "No such link exists for shareholder returns; companies often pursue growth to the detriment of their shareholders." Lots of idle cash looking for something to do along with rising indebtedness isn't a surefire recipe for success.

All of which is to say current cash hoards might not be as positive a development for investors as it seems at first glance. Anything, I'd argue, can be dangerous in extreme amounts.

Fool contributor Morgan Housel owns shares of Microsoft. Google and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. The Fool has written calls (Bull Call Spread) on Cisco Systems. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 29, 2010, at 11:51 AM, ChuckWoolery wrote:

    Mogan, another insightful article. I am concerned about Google and more so about Microsoft and their cash situation. My beleif is Google has a diverse enough business to survive a buyout flop and still grow on its own. Microsoft is a different story. Microsoft's management concerns me and their direction, or lack thereof, to put their cash to use in the business.

    MSFT sunk hard this year and they absolutely need to make a change to convince shareholders that they are making acquisitions, buying other companies or hiring new people who can create new business for them.

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