|Subject:||[socialcredit] Unlike Consumers, Companies Are Piling Up Cash|
|Date:||Thursday, March 6, 2008 07:40:46 (-0800)|
|From:||william_b_ryan <william_b_ryan @.....com>
I don't quite know how to explain this in terms of
Social Credit theory. Perhaps someone can help.
In theory, cash on hand, being bank credit, represents
debt that other parties have incurred to the banks.
Entrepreneurial spending accumulates into cash account
balances throughout the economy.
But this article states that the "typical American
corporation...has enough cash on hand to completely
pay off its debts." This could be the result of a
disproportionate increase in debt by the consumer
sector, so that the cash held by corporations
represents primarily consumer debt, long-term mortgage
debt and credit card debt.
What do you think?
F_A_I_R U_S_E C_L_A_I_M_E_D
March 4, 2008
Unlike Consumers, Companies Are Piling Up Cash
By DIANA B. HENRIQUES
Copyright 2008 The New York Times Company
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
“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
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
Those who study corporate balance sheets suggest that
several factors have contributed to this change in
corporate savings patterns.
In the last 25 years, the speed and scale of
globalization have increased sharply. That shift to
worldwide markets confronted companies with increased
currency risks, political risks and new competition —
all adding to the overall risk of doing business.
During the same period, conglomerates and similarly
diversified companies fell out of favor, as Wall
Street looked for “pure plays” and companies narrowed
their focus to a few core businesses — in effect,
putting more of their eggs in fewer baskets.
That left those companies more vulnerable to any event
that shook those baskets, Professor Dittmar explained.
“When firms become less diverse and more focused, they
become more volatile,” she said. And when that
happens, they need cash to cushion the bumps.
While rising risks may explain most of these changing
patterns, other business trends may also have had an
For example, the Stulz team’s paper shows that rising
cash levels were, to some degree, influenced by a drop
in capital spending on hard assets, which can be used
as collateral for borrowing. Similarly, the study
found, as companies increased their focus on research
and development investments, which are not as useful
for borrowing purposes, cash levels rose.
Moreover, cash has traditionally been just one
component of “working capital,” along with inventories
and accounts receivable. But innovations like “just in
time” supply chains and faster payment systems have
reduced the role of inventories and accounts
receivable and, conversely, raised the role of cash on
corporate balance sheets, Professor Dittmar said.
Adding to that, the corporate universe now contains a
higher percentage of the companies that have
traditionally held lots of cash, notably technology
companies. These companies now make up about 45
percent of the economy, up from less than 30 percent
in 1980. That would inevitably increase the overall
averages for cash ratios.
The study by the Stulz team, however, specifically
allowed for that change — and found that even among
technology companies, the ratio of cash on the balance
sheets has grown sharply over that period.
According to Mr. Trennert, the cash ratios at
technology companies have doubled since 2000.
With cash levels this high, Mr. Trennert said he
expected that some companies — those that also have
high levels of insider ownership — may elect to pay a
special dividend in the coming year, ahead of any
future change in the favorable tax treatment those
dividends now receive. “If I were a C.E.O.’s tax
lawyer, that would certainly be my advice,” he said.
As the Stulz team noted, this trend is in many ways
paradoxical and unexpected. In the last 25 years there
has been an explosion in financial products intended
to help companies manage risk — from currency
devaluations to commodity shortages.
“We would expect improvements in financial technology
to reduce cash holdings,” the researchers noted.
And yet, corporations have continued to cope with risk
the old-fashioned way: by saving for a rainy day. That
suggests that either corporations are not making
sufficient use of risk-management tools, or that the
tools themselves — while helpful — are inadequate to
cope with the increased levels of risk that companies
now confront, Professor Stulz said.
Some veteran investors also suggest another factor
that may have encouraged the growth in cash ratios.
Mr. Weintraub, the money manager, pointed out that in
the years examined in the Stulz team’s study, Wall
Street started giving greater weight to balance-sheet
Though that focus clearly faltered during the
technology stock bubble of the late 1990s, it is
coming back into vogue in today’s uncertain times,
said Quincy Krosby, an economist and chief investment
strategist at the Hartford, an insurance and financial
With the markets so unsteady, companies with soft
stock prices and solid balance sheets are attracting
attention from institutional investors, she said, in
part because the companies, especially in the
technology realm, have enough cash to expand their
market share through acquisitions.
But won’t big cash cushions turn these companies into
sitting ducks for leveraged-buyout firms or foreign
buyers spending today’s remarkably cheap dollars?
Maybe not — or, at least, maybe not yet.
Professor Dittmar noted that the credit squeeze has
made it less likely that highly leveraged private
equity funds can go gunning for cash-rich companies,
as they have in the past.
Political pressures, meanwhile, are likely to protect
American companies from hostile foreign buyers —
certainly through an election year, and even longer if
the Democrats take the White House and make gains in
Congress, Mr. Weintraub noted.
But, with the debt-burdened American consumer cutting
back, wouldn’t the risk of a recession decline if
companies with overstuffed wallets took their cash out
and spent it?
Emphatically not, said Professor Stulz. Research
strongly suggests that companies are holding more cash
because they need it to operate more safely in a risky
environment, he said.
“If they spend it, they will become more fragile,” he
added. “And an increase in the number of fragile firms
is not in the best interests of the economy.”
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