Is there such a thing as too much cash?
While it's hard for regular folk like you and I to even imagine having this dilemma, it's become a festering source of contention at many of the nation's largest corporations thanks to ever-expanding cash hoards of historic proportions.
What are they planning to do with this grubstake? Will shareholders see an increase in dividends? Will companies repurchase more shares? Will the money be plowed back into operations? Or will executives decide to sit tight and continue adding to their increasingly obscene stockpiles?
The scale of the cash "problem"
With unemployment still at elevated levels and a pernicious output gap, you may be surprised to hear that corporate America is reporting profits that we've never seen before. In the second quarter of this year, after-tax earnings for American companies came in at $1.8 trillion. That was 5% higher than the year-ago period, and a staggering 48% above the same quarter five years ago.
This inflow of profit has led to a massive accumulation of cash and equivalents on balance sheets both within and across industries.
The poster child of excess has long been Apple (NASDAQ: AAPL ) . Even after initiating a dividend and share buyback program of unprecedented proportions earlier this year, it still holds $147 billion in cash and highly marketable securities on its balance sheet. It had grown so large that hedge fund manager David Einhorn accused it of having a "depression-era mentality," saying that it's behaving like "someone who's gone through traumas ... they sometimes feel they can never have enough cash."
But Apple is not alone. Excluding financial companies, which are obligated to maintain a preordained quantity of liquid assets, the companies on the Dow Jones Industrial Average (DJINDICES: ^DJI ) hold a cumulative $460 billion in cash and equivalents. This is double the amount from 2006 and nearly quadruple the figure from 2000.
While technology companies are the clear standouts in this regard, the behavior can be seen at virtually every large American corporation. To mention only the most notable, General Electric (NYSE: GE ) has $87 billion in cash and equivalents, Pfizer's stash is $33 billion, and Chevron's comes in at $22 billion.
Where will all this cash go?
Given the scale of the issue, it's natural that shareholders have begun to wonder what corporate executives plan to do with these funds.
One obvious answer is that, as Apple did, many companies have already begun to return some of this capital to shareholders via dividends and share buybacks. According to data compiled by The Wall Street Journal, companies in the S&P 500 (SNPINDEX: ^GSPC ) are expected to pay at least $300 billion in dividends this year, exceeding last year's $282 billion. And the same is true of companies in the Dow Jones Industrial Average.
It's worth noting, moreover, that more cash would likely be returned to shareholders but for one complication: Much of it is held by overseas subsidiaries of the parent company. By repatriating the money, companies would be obligated to pay additional taxes on the funds, something that many are unwilling to do.
"At a time when American companies hold near record amounts of cash, many are surprisingly cash-poor at home," explained the Journal earlier this year. "That doesn't mean they could suddenly run out of money to pay their bills. But it does mean there could be unseen limits on their ability to pay dividends and buy back shares."
Apple and General Electric provide cases in point. Of the technology giant's $147 billion cash hoard, $111 billion, or 76%, is held overseas. In General Electric's case, 68% of its liquid assets are similarly off limit.
This, in turn, leaves two options. Corporate executives could decide to reinvest it back into their operations, or they could let it sit and continue to accumulate. While it's still too earlier to say what will happen next year, the earlier indications seem to favor the latter option.
Of the few companies to release 2014 outlooks thus far, Wal-Mart said that its capital expenditures will fall compared with the current fiscal year. Meanwhile, Boeing has expressed concern about the residual impacts of having the sequestration stretch into next year. And on its most recent conference call, Caterpillar's CEO pointed to the fact that there's "still much risk and uncertainty" in the world economy:
The direction of U.S. fiscal and monetary policy remains uncertain and the climate in Washington is divisive. Eurozone economies are far from healthy, and China continues to transition to a more consumer demand-led economy. In addition, despite higher mine production around the world, new orders for mining equipment have remained low. As a result, we're holding our preliminary outlook for 2014 sales and revenues flat with 2013 in a plus or minus 5% range.
Cash hoards will grow
Should companies be holding so much cash? That's a question that each business and its shareholders must answer. But if my reading of the situation is correct, the issue will only become more pressing as we head into the new year.
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