Weekend Economists Take a Chance and Call a Bluff July 26-28, 2013

[Demeter]

62. Companies sitting on cash pile of over $1 trillion—By CNBC's Bob Pisani

http://www.cnbc.com/id/100911328

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. Consider the places where they would spend their money:

1. Capital expenditures have not risen much;
   
2. M&A activity has been modest at best;
   
3. Buybacks have increased, but they are nowhere near levels before the financial crisis. For example, actual buybacks were $100 billion for the first quarter of 2013. If you go back to Q4 2007, there was $142 billion in buybacks, Q3 2007 there was $172 billion;
   
4. Dividends have gone up slightly, but they have gone down as a percentage of earnings. For the S&P 500, the payout ratio (the dollar amount companies are paying out as a percentage of earnings) is currently 36 percent; in Q3 2007 it was 45.8 percent.

Why is this happening? They seem uncomfortable spending the money. Why? The commentary seems to indicate they don't have a lot of visibility or confidence in future growth. The good news is that with so much cash, companies are likely to at least continue to raise dividends.

By the way: the sector that has the most cash is technology. That sector accounts for 41 percent of all the cash in Q1. Historically, technology also has the highest cash-to-market-value ratio (15.1 percent). And the cash hoard there has been growing fast: it's up 11 percent year over year.

Note: in calculating cash levels for the S&P 500, Standard & Poor's routinely excludes financials, utilities, and transportation, since they are required to maintain high cash reserves as part of their normal operating process.

Consumer Staples are also growing their cash hoard: in the first quarter they increased cash levels by 17.6 percent.

A SAMPLING OF THE COMMENTARY


rjd65 | Jul 24, 2013 05:53 PM ET
They also have record amounts of debt. There are two sides to a balance sheet CNBC.

ckoffend | Jul 24, 2013 07:06 PM ET
rjd65, actually your debt statement is very inaccurate. They do NOT have record levels of debt. Companies have been paying down their debt for several years. Last year, with bond funding becoming so cheap (3-4%), many companies sold bonds to get cheap money, cheaper than their projected growth rates. Now I am not a believer in debt and the additional costly risks one takes on with ANY kind of debt. But when you can borrow money long term at 3-4% and create a return of 5-8% that is not such a bad idea. They knew/know that rates won't stay low that long, making it better to get the cheap money before it is needed than to wait for the rates to go back up and pay a much higher rate when you actually do need the money.

rjd65 | Jul 24, 2013 07:29 PM ET
ckoffend, you seem to be contradicting yourself. You just stated that they have levered up on cheap bonds (and I am arguing they have done so in record amounts). The low coupon rate is irrelevent to me. Whether it is bond debt or just bank borrowing debt, it is still debt that must paid back. What we are talking about here is record leverage. No one will convince me all is well. A balance sheet supposedly never lies, unless of course off balance sheet items exist, of which there are a lot of those games still being played.

lawabidingcitizen1 | Jul 24, 2013 09:14 PM ET
They're gonna need it for protection when the revolution starts

indypen | Jul 24, 2013 09:19 PM ET
When companies start investing capital in their business, the recession/depression will be over. I am not talking about stock buybacks, bond refinancing or accounting gimmicks. I am describing combining capital, labor and resources that will achieve a higher rate of return to investors. That, my friend, is Capitalism. You left-wing morons do NOT understand FREE markets. You think STATISM will provide for you, disregarding any and all history of STATISM!!!!

Earth_Scientist | Jul 24, 2013 10:16 PM ET
They should add one more place to the list: "Consider the places where they would spend their money: 1. Capital expenditures; 2. M&A; 3. Buybacks; 4. Dividends; ADD: 1. HIRING and RAISES With the great job done by workers, we have near-record profits, but very low wages. Let's return some of the profits to workers, instead of just sitting on the cash. This will get the economy moving again. Spread the wealth around.