Cash Piles Up as U.S. CEOs Play Safe With Slow-Growth Economy
Any lament that U.S. executives are sitting on cash at their companies instead of investing in plants and equipment may be about to get louder.
The buildup of cash and marketable securities accelerated in the first quarter on a year-over-year basis to a record $1.73 trillion after slowing in early 2012. At the same time, capital spending in the most recent quarter rose by the least since March 2010, when the U.S. was still emerging from a financial crisis.
The trends, based on data from about 2,300 U.S. companies compiled by Bloomberg, suggest executives’ lack of need or confidence to invest deepened with threats of federal spending cuts and the economic slowdowns at home, in Europe and China. Without a pickup in spending, the U.S. economy loses a driver of job creation and risks staying locked in below-average growth, giving even more cause to hold tight.
“What concerns me is that companies have all of this excess cash and they are not deploying it into their long-term operations,” said Nick Raich, chief executive officer of the Earnings Scout, an independent economic research firm based in Cleveland. “Public outcry will erupt if companies do not spend and create jobs.”
The cash hoard reached a record in part because of rising corporate profits, aided by cost savings imposed during the financial crisis in 2008 and 2009. Europe’s recession, China’s slowing economy and a 35 percent tax awaiting companies when they bring money earned overseas back to the U.S. all provide little incentive to invest, economists and money managers said.
“If the economy were growing rapidly and more consistently, companies would be investing like crazy,” said Diane Swonk, chief economist at Mesirow Financial Holdings Inc. in Chicago. “We’re just not there yet.”
The buildup, one point of contention in last year’s U.S. presidential contest, remains an interest of Congress.
U.S. Senator Carl Levin, a Michigan Democrat, took Apple Inc. (AAPL) to task at a May 21 hearing for practices that he said allowed it to avoid $9 billion in U.S. taxes last year, in part by keeping money overseas. Chief Executive Officer Tim Cook said the U.S. should change tax policies to make it less costly for companies to repatriate overseas profit to put to use at home.
“When uncertainty is rearing its head, you want to preserve cash,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Asset Management in Birmingham, Alabama. Among his wealthy clients who own businesses, he said, “it’s all about cost management and a reluctance to invest. They’re not laying people off, but when somebody quits they don’t replace them. That goes into building cash.”
Among 2,267 non-financial members of the Russell 3000 Index, corporate cash increased about 13 percent in the latest quarter from a year earlier, according to the data compiled by Bloomberg. The increase to a record $1.73 trillion was the most since a 16 percent gain in the second quarter of 2011.
As for capital expenditures, the most recent quarter’s year-over-year gain of about 3.1 percent was the smallest increase since March 2010. The spending declined 21 percent when compared with the final three months of 2012, marking the biggest quarter-to-quarter drop since the depth of the financial crisis in March 2009.
For a while it looked as though companies were starting to slow the buildup in cash, beginning in 2011 as the U.S. economic recovery and job growth strengthened. The year-over-year gains fell below 10 percent for five straight quarters, to as low as 5 percent in the second quarter of 2012.
That changed in last year’s second half, with the U.S. presidential election under way and Congress struggling to reach a compromise on the federal debt as automatic budget cuts loomed. Most of the past year’s growth in cash occurred in the final six months of 2012. Cash rose about 3 percent in the most recent quarter from the end of 2012.
One other reason companies aren’t tapping cash is that they can easily borrow from lenders or go to the bond market when a need arises because Federal Reserve monetary policies are keeping interest rates at near-record lows.
“So long as borrowing costs remain low, it’s hard to see why companies would feel compelled to drive down their cash balances in any meaningful way,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York.
While borrowing does happen on a case-by-case basis, the capital-spending decline suggests companies haven’t simply turned to that method as an alternate to cash. There can be other reasons to borrow, such as avoiding U.S. tax consequences.
Apple, which holds $102 billion of cash and investments outside the U.S., opted to borrow to help finance a plan unveiled last month to return $100 billion to shareholders. The decision saved the Cupertino, California-based iPhone maker as much as $9.2 billion in taxes, Moody’s Investors Service said.
Cook, in this week’s prepared Senate testimony, said that lowering corporate income taxes and imposing a “reasonable” tax on foreign earnings brought back to the U.S. would “stimulate the creation of American jobs, increase domestic investment and promote economic growth.”
While Apple’s accumulation draws attention, the practice is widespread across multiple industries and company sizes.
Cash and marketable securities more than doubled from a year ago to at least $1 billion at 28 companies in the Russell 3000. They include Yahoo! Inc. (YHOO), Dish Network Corp. (DISH) and Fairfield, Connecticut-based GE, which boosted cash almost threefold to $22.1 billion including proceeds of $16.7 billion from the sale of its remaining interest in NBC Universal to Comcast Corp. (CMCSA) in February.
PPG, a producer of specialty chemicals and protective coatings, boosted cash and short-term investments to $2.38 billion in the most recent quarter, an increase of $1 billion from a year earlier, said Jeremy Neuhart, a spokesman.
The sale of the Pittsburgh-based company’s commodity chemicals business generated more than $900 million in cash, he said, adding that PPG is evaluating acquisitions, share buybacks and capital spending in emerging markets.
Caterpillar, the world’s largest maker of construction and mining equipment, more than doubled cash to $3.59 billion in the most recent quarter after reducing inventories by $2.5 billion and curtailing factory operations in the previous six months.
The Peoria, Illinois-based company reduced its full-year revenue and profit outlooks last month, citing sinking demand for bulldozers, loaders, trucks and other mining equipment. It also cut projected capital spending to less than $3 billion from about $3.4 billion, Michael DeWalt, director of investor relations, told analysts on an April 22 conference call.
“Companies aren’t investing because their demand backdrop is weak,” said Dutta, of Renaissance Macro Research. “If they were to invest cash and the investment wasn’t profitable, that’s just going to hurt their margins.”
About 71 percent of companies in the Standard & Poor’s 500 Index beat analysts’ earnings estimates in the most recent quarter, according to data compiled by Bloomberg. Still, fewer than half exceeded sales projections, leaving little incentive to spend to expand production, said Matt McCormick, who helps oversee $9.1 billion as a money manager at Cincinnati-based Bahl & Gaynor Inc.
“If you are a CEO or a CFO, you aren’t going to get fired or criticized by your board for keeping a little bit more cash,” McCormick said in a telephone interview. “They are not going to take a lot of risk in this environment.”
The U.S. economy may cool to a 1.6 percent pace in the second quarter, after growing at a 2.5 percent rate in the first three months of 2013, according to a Bloomberg survey of economists from May 3 to May 8. The projected slowdown reflects the lagged effect from a two percentage-point rise in the payroll tax at the start of 2013 and $85 billion in automatic budget cuts that began on March 1.
Economic growth has averaged 2.1 percent year-over-year since the recovery began in June 2009, trailing the 2.7 percent average in the previous expansion.
The forecast so far hasn’t dimmed investors’ view of equities. The S&P 500 (SPX) and Dow Jones Industrial Average (INDU) have each gained at least 16 percent this year and are trading near record levels.
“Some companies don’t think they need to invest as much because they don’t see demand rising,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees about $180 billion. “They feel comfortable they can meet the demand of their customers with the capacity they have.”
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