U.S. Companies Hoarding $1.93 Trillion in Cash

By: Money_Morning

Don Miller writes: U.S. corporations are piling up cash at the fastest rate in half a century. But instead of signaling a new wave of spending, that cash pile may mean tough times ahead.

Non-financial companies in the United States had stacked up $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the U.S. Federal Reserve said Thursday. Cash made up 7.4% of the companies' total assets -the largest chunk since 1959.

But capital spending and plans to hire new workers remain subdued, showing the deep concern companies harbor about a painfully slow economic recovery that has failed to put a dent in high unemployment and reignite consumer spending.

With interest rates at or near zero, companies holding huge amounts of cash are suffering from record low returns on their money. But the huge cash hoard may indicate that managers don't see many opportunities to put their money to work without incurring huge risks.

"The corporate sector is looking at the household sector and saying, this is not the environment where we should expand our business," Deutsche Bank AG (NYSE: DB) economist Torsten Slok told The Wall Street Journal.

Companies have a number of options when cash becomes a big part of the balance sheet. They can deploy excess cash to increase dividend payments, acquire other firms, buy back their own shares, reinvest in operations or simply retain the cash in the form of cash or short-term marketable securities.

"There is greater pressure on companies that are either not paying dividends now or are paying below-market yields," Brett Hryb, senior portfolio manager in U.S. equities at MFC Global Investment Management, told The Journal.

But dividend payouts in the United States are trailing many other developed markets, including the United Kingdom, Australia, New Zealand, France, Italy, and Spain. For example, Australia has a dividend yield of about 4% while the current dividend yield on the S&P 500 is about 2%.

In recent months, many companies including Nike Inc. (NYSE: NKE), Intel Corp. (Nasdaq: INTC), Baxter International Inc. (NYSE: BAX), United Parcel Service Inc. (NYSE: UPS), and Johnson Controls Inc. (NYSE: JCI), have announced dividend raises. But despite those increases, the total level of payouts from U.S. companies remains well under the levels from two years ago.

Among Standard & Poor's 500 Index companies, 368 are now paying dividends, up from 363 in 2009 but below the 2008 tally of 372.

"It's been a great year, but we are still nowhere near where we were in 2008," Howard Silverblatt, senior index analyst at Standard & Poor's Indices, told The Journal.

But there is a silver lining. Changes to dividends netted out to a $40.2 billion drop for shareholders in 2009, but companies added back $15.4 billion in payouts through the third quarter, Silverblatt said.

Companies "are under increasing pressure to use their cash for mergers and acquisitions (M&A) and buybacks, with dividends now on the list," he said.

A flurry of mergers and acquisitions in late November raised hopes that activity would jump in 2011.

Indeed, thanks to low prices for takeover target companies, easier credit terms, and historically high cash balances, the atmosphere for deals in 2011 is as positive as it's been since the credit crisis sent the economy, and M&A activity, into a tailspin.

Global M&A activity is expected to increase 36% next year to $3.04 trillion, driven by a big pick-up in deals in the real estate and financial services industries, according to a report released Monday by Thomson Reuters and Freeman Consulting Services.

But the survey of over 150 worldwide corporate decision makers also showed that next year's buyers are expected to focus on expanding their core businesses to increase market share. That could lead to a wave of consolidation instead of a hiring binge.

Moreover, the surge in M&A will be focused in emerging markets, especially Asia, where the average cash balance of companies was almost double that of U.S. companies.

Buying back shares is another use for cash, but those programs are also controversial.

Companies argue that buybacks reduce float, or the number of shares outstanding, especially when they consider shares to be cheap. Usually when a buyback program is implemented, it gives a short-term pop to stock prices. But when that happens, executives rush to exercise their options and sell shares.

Also, some investors consider buybacks to be an indication that management is incompetent because they don't know how to grow the company by doing an M&A deal or investing in research and development.

Another objection to buybacks is that companies may overpay. From 1986 through 2002, the old General Motors Co. (NYSE: GM) spent $20 billion on buybacks with money that should have gone to shoring up its finances, William Lazonick, director of the Center for Industrial Competitiveness at the University of Massachusetts Lowell, told Bloomberg News.

In the past decade, Microsoft Corp. (Nasdaq: MSFT) has spent more than $103 billion on buybacks, yet its stock trades at about half its 2000 high.

"A lot of companies are just stupid about buybacks. There should only be one reason you buy back shares: You think they're going up." Daniel Niles, senior portfolio manager at asset management firm AlphaOne Capital Partners, told Bloomberg.

For the foreseeable future at least, cash looks like it will remain king in the boardrooms of corporate America.

Money Morning/The Money Map Report

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