OLD Media Moves

Companies holding onto more cash

July 30, 2013

Posted by Liz Hester

A survey released Monday showed that corporations are beginning to hold onto more cash, many citing worries about the Federal Reserve’s monetary policy as the reason for the hoarding.

Here’s the story from the Wall Street Journal:

U.S. companies are once again holding tight to their cash in the latest sign of worry that central bankers may soon turn off the easy-money spigot.

A survey of chief financial officers and treasurers released Monday shows firms are hoarding increasing amounts of cash, after loosening their grip on their money last year.

The July survey by the Association for Financial Professionals of companies with $1.5 billion in median annual revenues also showed CFOs expect to have more cash by the end of the third quarter than they do now.

The study said the executives’ confidence is waning as the Federal Reserve considers winding down its $85 billion a month bond-buying program. The Fed has said a pullback depends on strengthening U.S. growth, but expectations for less stimulus have made executives and investors anxious about whether the economy can stand on its own feet. These fears are crimping company spending on everything from mergers to building new plants and hiring workers.

“Companies at the minimum seem to be a little apprehensive about some things, one of them probably being the expectation in the market that the Fed will slow its pace of stimulus at one of the future meetings,” said Kevin Roth, managing director of research at the AFP in Washington.

CNBC.com had a similar story saying companies in the S&P 500 are holding onto more than $1 trillion in cash:

Corporations are hoarding cash: despite dividends and buybacks, cash is likely to hit another record high.

Cash set a record in the first quarter of 2013 on an absolute basis: $1.093 trillion in the S&P 500. It has set a record for 18 of the last 20 quarters.

With 47 percent of the S&P 500 reporting, we are once again on track for record cash levels.

What’s going on? The short answer is that companies are not spending as much…they have record earnings, but they are holding on to a lot of the money.

The Journal pointed out that uncertainty over where the economy is heading is also causing companies to hold tight to their money:

Expectations the Fed could taper this fall, as well as volatility in everything from foreign-exchange rates to health-care costs, has companies reticent about spending. Industrial companies making up the S&P 500 stock index are on track to set a record in their cash holdings for the second quarter, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

“They’re not making a lot of money on investments,” said Mr. Silverblatt. “When they do decide to spend it, they’ll have a big shopping list.”

Removing the Fed stimulus could make it costlier for companies to borrow and refinance their debt. The yield on a Barclays index of U.S. investment-grade company debt was 3.22% as of Friday’s close, already significantly higher than its record low of 2.58% from early May.

Companies have also been deferring acquisitions and other investments.USA Today reports that Apple is currently sitting on a large stockpile of cash, something that benefits investors despite their lackluster earnings this quarter:

Apple’s latest quarterly report showed savvy investors two things clearly.

The first is that the entity run by CEO Tim Cook essentially has been transformed from Apple, the company, into Apple, the bank.

The vault of that bank is now wide open, and Cook is sharing Apple’s massive and growing cash hoard — worth $68 billion (and climbing) at the end of June — with its shareholders in the form of fat quarterly dividends and even larger share repurchases.

The quarterly results also showed, however, that while no income investor should be without Apple stock in their portfolio, no growth investor should be anywhere near it.

As companies continue to wade through mixed economic news, such as falling existing home sales, and weaker consumer confidence numbers what they do with cash will become increasingly important. If corporations aren’t using money to invest, buy each other, or hire new workers, the overall economy may take a dive.

It’s also important to note the sentiment behind holding cash. Confident businesses tend to spend and set themselves up for growth in the future. Those sitting on money aren’t using it to create new product lines or better their technology. Not only does this hurt in the short-term, but it could also dampen long-term growth for many sectors.

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