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:

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.