Cash For That Rainy Day

It's a problem that many companies would like to have. With profits booming, companies such as General Motors, Chrysler, IBM, Microsoft, and Intel are running up multibillion cash hoards. In particular, GM and IBM, near-basket cases just a few years ago, together have $25 billion in cash, enough to fund the New York City budget for almost a year.

Now the question is: What should these companies do with their spare cash? In the 1980s, it became an article of faith, especially during the leveraged buyout boom, that a company with a big cash pile was doing something wrong--if it couldn't find a good immediate use for the money, it should distribute the cash to shareholders in the form of stock buybacks or higher dividends. There's no lack of either these days. Dividends are up by 8% over the last year, and companies have been engaged in huge stock buybacks. IBM bought back almost $11 billion in shares over the last two years.

Yet despite the conventional wisdom, cash-rich companies may be doing the right thing by not rushing to boost distributions. Commerce Dept. figures reveal that corporations are paying out about 66% of after-tax profits as dividends. That's about the same percentage as the 1980s, but much higher than in the 1960s and 1970s, when investors received only 40% of profits as dividends.

Instead, many companies are worried about what might happen during the next business cycle. In the chip industry, the successful businesses are the ones with resources to continue investing even during downturns, as Intel knows. And auto makers such as Chrysler and GM learned the need for a cushion during the last recession. Indeed, the cash stockpiles give U.S. companies a competitive advantage against foreign competitors who are mostly not quite so flush.

Moreover, from a long-term perspective, using some spare cash to reward workers makes sense. Despite an uptick in wages, the share of corporate output going to worker compensation is at its lowest level since 1969--and still falling. If workers cannot share in the rewards now, it will be harder to persuade them to make sacrifices when the economy slows, as it inevitably will. That's why Intel used $1.3 billion of profits in 1996 to buy back stock shares that are used to reward employees. Such measures may not be popular with Wall Street today but may be the best route to long-run success.

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