Companies Are Piling Up Cash
By DIANA B. HENRIQUES
At least someone knows how to fill a piggy bank.
Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts.
That should be good news in an economy unsettled by rising energy prices, tightening credit, gyrating stock prices and declining values for the dollar and the family homestead. Indeed, the Federal Reserve chairman, Ben S. Bernanke, cited strong corporate balance sheets as a bright spot in the darkening forecast he presented to Congress last week.
Some analysts also speculate that these cash-rich companies may start sharing their wealth with investors through special dividends, providing welcome stimulus for the economy.
Corporate spending on equipment and other capital expenditures has declined as savings have soared, suggesting that companies could stimulate the economy now by going on a hiring and spending spree. But that raises worries among some analysts that companies will spend their cash unwisely, making them more vulnerable in the future.
The increase over the last decade in the amount of cash, as a percent of total assets, for the companies in the Standard & Poor’s 500-stock index has been steep. One study shows that the average cash ratio doubled from 1998 to 2004 and the median ratio more than tripled, while debt levels fell. According to S.& P., the total cash held by companies in its industrial index exceeded $600 billion in February, up from about $203 billion in 1998.
René M. Stulz, who holds the Reese chair in banking and monetary economics at the Fisher College of Business at Ohio State University, said research he conducted with two other professors on corporate cash levels since 1980 indicated that growing cash holdings over that period most likely reflected the simple fact that the world became a much riskier place for business.
“Companies responded to those rising risks by saving more,” said Professor Stulz, whose study excluded utilities and financial companies because their cash reserves are monitored by regulators.
An even longer savings trend was spotted by Jason DeSena Trennert, managing partner and chief investment strategist at Strategas Research Partners in New York, who said his own rough examination of corporate balance sheets shows that “cash, as a percent of total assets, is as high as it’s been since the 1960s.”
The ledgers of many individual companies bear out these findings. For example, the cash ratio at Paychex — cash and short-term investments as a percent of total assets — has more than doubled, from less than 30 percent in 1988 to more than 70 percent by last summer. Over the same period, Apple’s cash ratio grew to more than 60 percent, from just over 38 percent.
The cash ratio at Avon Products, just under 3 percent in 1988, was nearly 17 percent by last December. And Microsoft’s savings account is so large that its chief financial officer has observed that the company could, if it wished, cover most of the $20 billion cash component of its pending $44.6 billion offer for Yahoo from its own reserves.
This cash-saving trend may have a downside, though. Because companies can spend from their own account without scrutiny from the investment bankers or commercial bankers who might otherwise lend them money, corporate executives can do some really dumb things with their cash, said Amy Dittmar, an assistant professor at the Ross School of Business at the University of Michigan, who has studied corporate spending habits in the United States and abroad.
“There is a subtle line between having enough money to do what you have to do versus having enough money to do anything you want to do,” Professor Dittmar said.
Manny Weintraub, a former managing director and top-performing money manager for Neuberger Berman who formed his own investment advisory firm in late 2003, agreed. “Like your mother told you, the rule should be that if you don’t have anything nice to buy, don’t buy anything,” he said.
The Stulz team’s study showed that this trend of rising cash ratios was not limited to very large corporations — indeed, the average increase is more pronounced among firms below the top one-fifth of the sample.
Over the same time, the study found, one measure of corporate debt — the net debt ratio, or debt minus cash as a percent of total assets — fell so sharply that, by 2004, it was below zero, where it stayed at least through 2006.
“In other words,” the researchers noted, “on average, firms could have paid off their debt with their cash holdings.”
Those who study corporate balance sheets suggest that several factors have contributed to this change in corporate savings patterns.
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