Massive Corporate Cash Hoards Are Likely to Grow in 2014

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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  • Report this Comment On November 30, 2013, at 9:39 AM, rcbarron wrote:

    John Maxfield's article demonstrates the primary problem with the U.S. economy. While cash hoards are 5-6 times what they were in 2000 (thanks to tax free and lower tax options coupled with lower interest costs,propelling cash holding) and dividend pay outs are double (but should be more) the one area that has gone down..even with all this wealth payments to employees. John fails to even bring that up as an option for a good use of the cash hoard. With all this growth and profit, and cash hoards at never before seen levels, the working people are being paid less, and sharing less in the profit at companies they work, than anytime in the last 100 years. John, did it ever occur to you that paying employees more could be an option for the cash? You failed to mention the cash Walmart has..they are the poster child of full time employees living in poverty! There was an understanding that companies had a civil and social duty to the right thing for their communities and stakeholders, including the employees...they've drop the ball there and need to be called out because that is a primary reason our economy is so divided. Unbelievable wealth on one poverty on another. John should have pointed out a graph that shows employees being paid flat or less (especially less with inflation figured in) since 2000.

  • Report this Comment On November 30, 2013, at 2:26 PM, tomd728 wrote:

    mr. barron.......from where does the assumption of "total poverty" work it's way into any formulary on cash hoards being built ? these deep pocket enterprises who can run their operations while paying dividends, re-casting debt, share buy backs,etc.? And of course invariably there is a "trickle down" to workers in the form of increased salary,stock purchase plans, 401 k,employer sponsored health insurance etc., etc.

    certainly not for all employers in lock-step with the above but an across the board benefit that begs the questions and policies that keep "cash is king" in this or any other business environment.

  • Report this Comment On November 30, 2013, at 2:39 PM, Daniel7801 wrote:

    I agree with Mr. Barron on this. Since the 1970's, middle class wages have stagnated and productivity soared. This past 40 years has seen the link between workers wages moving in lock step with increased productivity severed and the productivity gains accruing to the corporations, upper management and investors. Somehow, this link needs to be reestablished. As a number of corporations are beginning to find, if workers don't have the income, they can't buy the product.

  • Report this Comment On November 30, 2013, at 4:33 PM, todamo13 wrote:

    Walmart, McDonalds, etc, pay such sorry wages that their workers have to be supported by foodstamps from taxpayers just to survive. While the companies continue to grow their ridiculous cash profit hoards.

    And given how these companies have prospered because of the society, economy, and infrastructure in America, why exactly is it so unthinkable for them to bring their foreign profits back here and pay some tax that might actually somewhat help keep this country running that they've so benefitted from?

    Instead, take the recent example of Boeing (which required generous tax breaks and subsidies to agree to locate operations in Washington state to begin with). Now they are threatening to leave if their workers won't agree to a big cut in benefits. While, of course, the company posts record profits.

    What happens when there is no middle class left that can afford anything made by these companies?

    If corporations are people, these act like psychopathic vampire 4-year-olds with anemia and a really short attention span.

  • Report this Comment On November 30, 2013, at 5:19 PM, rdsbobby wrote:

    So why did the DEMOCRATS to fix this while they had absolute power. They had the opportunity to do something but failed to. Or may be we should say they lost their nerve to TAX?

  • Report this Comment On November 30, 2013, at 5:23 PM, rdsbobby wrote:

    Comment for damo13 , remember it is the stock holder that takes all the risk. Not the employee. So it is the stockholder that needs to be rewarded. The employee will not bail out the stockholder when things go bad. As a matter of fact it is normally (Think GM) the employee that is the root cause of failure. While I agree management is greedy, so too is labor. If you don't like it go work someplace else. Remember if I don't invest, the employee has no job. They are employed as a result of my investment.

  • Report this Comment On November 30, 2013, at 5:30 PM, mrspeabody wrote:

    Are Apple and GE known for low wages? I haven't heard that but if it's so, let me know. McDonalds is a burger joint. No one expects to get rich working at a burger joint. It's the place high school kids get their first job, learn to come to work on time, not be stoned or hung over, punch a time clock and actually work while they're there. Then you should go on to bigger and better things. Walmart, well, that's another story. Working for the world's largest retailer should get you a living wage. Especially when you take into consideration the large number of people that work at any given store. Sometimes it's the largest employer in an area. That puts a certain amount of civic reponsiblity on it.

  • Report this Comment On November 30, 2013, at 5:53 PM, rukdng wrote:

    With the abrogation of labour's influence the individual has very little impact on corporate policy. It is too easy for large corporations under present circumstances to relocate and avoid paying reasonable wages and appropriate taxes. Globalization while good for corporations doesn't do a whole h*** of a lot for anybody else.

  • Report this Comment On December 06, 2013, at 7:59 PM, HanSoLow wrote:

    @rcbarron, even if the corp wanted to pay the employees more, they would still run into the same DOUBLE taxation of overseas profits on the repatriation. Morgan Housel had a great graph on exactly what you asked:

    It showed that 2000 and 2007 were abnormal peaks on a slowly inclining total compensation plot of US workers. He also made the point that while money in the pocket from the paycheck might seem flat, the majority of the increase in compensation has gone towards the EMPLOYERS contribution to the employees health coverage and retirement.

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