Perhaps the biggest, and most overtouted, silver lining of the US depression is the massive (presumably) amount of cash held by corporate America, built up over the past two years thanks to massive headcount reductions, overall cost-cutting, and record drops in CapEx investment. And while American non-financial companies currently do indeed have a record $943 billion of cash (of which however $233 billion is in short-term investments), they also have a record amount of debt to go with the cash: 3,394 billion at mid 2010. In addition, as we have long cautioned, nearly a quarter of this cash is held abroad and can not be repatriated. Furthermore, putting the $1 trillion in perspective, it is slightly higher than the total combined annual corporate capital spending and dividend payments by non-financial companies. As such, the cash buffer is certainly not as big as is touted by assorted permabulls. In fact, as even Moody's, which has just released the most comprehensive analysis on US corporate cash discloses, "companies are unlikely to spend their cash on expansion and hiring until there is greater certainty about the direction of the U.S. economy." The primary culprit: companies are all too aware of the record excess capacity slack, and that there is no need to invest for the future until others do so first. But we already knew that. And since we have already been digging underneath the surface of the US cash hoard, and uncovered a variety of unpleasant facts, it has been remarkable how quickly this topic is no longer a talking point among CNBC's anchors and is only brought up by its most clueless guests who don't realize only the dunces now use this argument (kinda like the whole "green shoots" thing that did miracles for Dennis Kneale's career). So here are all the details about the corporate cash stash, and a whole lot more.
First, we present some big picture thoughts from Moody's, which to our surprise was also unable to come up with a favorable scenario that sees this cash as being promptly reinvested into the floundering economy:
The balance sheets of U.S. non-financial companies are in good shape, in contrast to government and household balance sheets. Some $943 billion of cash and short-term investments sat in their coffers at mid-year 2010, compared with $775 billion at the end of 2008. Corporate America could use these cash holdings to cover a year’s worth of capital spending and dividends and still have $121 billion left over.
Economists, politicians and everyday Americans contemplate how that cash, if invested in inventory and plants, could strengthen the U.S. economy and get more people back to work. But we believe companies are looking for greater certainty about the economy and signs of a permanent increase in sales before they let go of their cash hoards, which they suffered so much to build. Given low demand and capacity utilization within certain industries, companies are wary of investing their cash in new capacity and adding workers, thereby doing little to abbreviate the jobless recovery. It also does not help that much of the cash, perhaps one-fourth, is located offshore and unlikely to be repatriated to the U.S.
And confirming that there are no organic growth opportunities in the US, a fact that the administration should be ashamed of more than any of its other disastrous economic policies, is Moody's osbervation that the only possible use for the record cash is not for capex and hiring, but for synthetic shareholder friendly actions:
The cash provides U.S. companies safety come rain or shine. In the event of a relapse in the U.S. economy, the cash will buffer the downturn. If the economy gradually improves, we expect more companies to begin buying back shares as it is hard to justify to shareholders ever-increasing cash balances that yield a less than 1% return. We also think that mergers and acquisitions will be a more probable use of cash over the next couple years. With low interest rates and generally low company valuations, we expect companies will seek to consolidate their market positions or add complementary businesses.
In fact, by "adding businesses" companies will ultimately let even more people go! After all the primary driver of most M&A are "synergies" which is a prospectus-friendly way of saying mass layoffs. Essentially, the greater the corporate behemoth, the worse off the US middle class is. But far be it for us to point us such minor details on the grand scheme to a communist paradise.
The chart below summarizes the total cash and short-term investment holdings of corporate America. It is notable, that while the total has grown since 2009, it has been purely due to the increase in short-term investments (we are confident companies would love to hear about another run on money markets that would lock their $233 billion in short-term holdings indefinitely).
Here are the key summary findings on America's cash:
- Total cash and short-term investments at U.S. non-financial firms that have Moody’s ratings were $943 billion as of mid-year 2010, up from $775 billion at year-end 2008 and $937 billion at year-end 2009.
- The top 20 companies held $346 billion of the cash, or 37% of the total.
- The top cash-heavy industry sectors are technology ($207 billion), pharmaceuticals ($124 billion), energy ($105 billion), and consumer products ($101 billion).
- Much of the cash held by the larger companies is overseas and not likely to be repatriated to the U.S. Multi-national companies need this cash to finance their international operations, which are often growing faster than their domestic businesses. In addition, unfavorable tax consequences discourage the repatriation of cash to the U.S.
- The firms’ aggregate capital expenditures over the last 12 months were $576 billion, making the ratio of cash to capital expenditures 1.64 times. This exceeds the ratio as of December 2007 and December 2008, when it was 1.1 times, and it may be an all-time high. U.S. companies have the capital to fund normal and even extraordinary capital spending, and in many cases acquisitions, without having to raise additional financing.
- Likewise, current cash can easily cover the study group’s annual dividends, which were $246 billion over the last 12 months.
- Together, capital spending and dividends were $822 billion over the last 12 months, equal to 87% of the firms’ mid-2010 cash holdings.
- Many companies have bolstered cash through debt offerings, especially in 2010. Much of the debt-issuance proceeds have been used to refinance existing debt, but some has been stockpiled for broadly termed general corporate purposes.
- At mid-year 2010, the aggregate cash-to-debt ratio was 0.28, materially better than the 0.23 at December 2008. While we hear a lot about the looming debt refinancing cliff, receptive bond markets and generation of operating cash flow are combining to make the cliff look less intimidating for the stronger, higher-rated companies.
As the chart below demonstrates, total cash has grown not so much as a function of cash from operations increasing notably (it hasn't), which has been flat for the past 4 years, but due to a massive cut in the outflow side of the equation: CapEx and Dividends.
While the much ignored concept of corporate debt is also at a record, the total debt/cash ratio has indeed dropped. However, since the end of 2009, it has once again started to creep back up, and is now at 3.6x from 3.58x at December 31.
And just like in the stock market, where a few companies are accountable for a majority of the action, so here, the top 20 US companies are responsible for 37% of the total cash and short-term investments, holding $346 billion of cash and ST investments.
A granular analysis of cash sources and uses indicates that in 2009 Working Capital was a notable source of cash, at a time when debt issuance dropped notably (but is again growing in 2010), while cash buybacks have been relatively flat.
Focusing specifically on Funds From Operations (net income):
The speed and depth of the economic downturn led U.S. companies to very quickly downsize their operations and lower costs. The latest recession was not a rolling recession like we have often experienced. In the past, companies typically delayed taking painful actions or took small steps while they waited to see how bad and how long-lived the downturn was likely to be. However, in the autumn of 2008, it was painfully clear that the downturn was going to be bad. Many industrial companies reported that “the phones just stopped ringing.”
For example, in the U.S. steel industry, industry-wide capacity utilization went from 86% in mid-September 2008 to 50% by Thanksgiving. It was to remain in the low 40% range through the first half of 2009. The energy industry had been flying high with oil prices at $140 per barrel in July, but they declined to $32 per barrel by December, and the U.S. rig count dropped in half between mid-September 2008 and May 2009. The Purchasing Managers Index (PMI) dropped from 49.2 in August 2008 to 32.5 in December, the lowest level since 1980.
On top of the dire demand picture, the near total freeze-up of credit markets was a shock. Companies adopted the view that their lenders could not be relied on to help them through a liquidity problem. They were in the middle of the ocean in a leaky boat and no one was coming to the rescue. Just to be safe, many non-investment grade rated companies drew down their credit lines and parked the cash in the bank.
Therefore, with little hesitation, the companies moved quickly to ratchet down costs. They idled plants, took rolling downtime, and furloughed or laid off employees. Some large manufacturers cut their workforces by up to one-third of pre-recession levels.
Today, with demand still relatively low, companies are not rushing to bring back workers until they are certain the storm has passed. While the net effect of these cost-cutting actions has not fully offset lower sales, it has enabled many companies to at least be modestly profitable. In many cases, this has been a remarkable performance compared to previous, more mild recessions.
The cost cutting also positions them well for what should be an impressive performance once the economy normalizes. The benefits of even the small recovery we’ve had so far are evident in sales and operating income. In 2009, the firms we studied for this report had operating income of $812 billion on sales of $8.65 trillion. As of mid-year 2010, only six months later and without a meaningful improvement in most key economic indicators, sales were up 5% (to $9.07 trillion) but operating income was up 19% (to $969 billion), on an LTM basis. We also note as of mid-year 2010, corporate sales and operating income are almost back to their 2007 pre-recession levels.
In other words, companies are massively leveraged to economic improvement. It also means that record high corporate margins have only one way to go from here: down. The trade off to this record lean efficiency is 17% unemployment. And just as corporate cash levels will not drop any time in the near future, so will employment levels not improve. But at least corporate CEOs are better off. And they all have the chairman to thank.
Next, we look at working capital:
In 2009, aggregate sales for the study group fell 12% from 2008. But for companies in highly cyclical industries such as manufacturing, durable consumer goods, chemicals, automotive, and construction, the sales declines were often 20% to 40%. In this environment, working capital investment fell sharply and released a total of $72 billion in cash in 2009. It is not an exaggeration to say that, at the height of the credit crisis, working capital was a more certain source of liquidity than the banking system.
Reduced inventory was the largest contributor to cash from working capital. Companies were able to live off their pre-recession finished goods inventory for many months and at times waited to have orders in hand before purchasing materials or manufacturing necessary parts. In other words, inventory was pulled down and not replenished. Many companies are still taking a cautious approach to inventory until there are stronger signs of economic growth. As a result, inventory in terms of days or months on hand is below the historical average for many industrial sectors.
Accounts receivable also shrunk, but a good portion of this dis-investment was offset by reductions to accounts payable.
Note the underlined text: during the next crisis, it will be prcisely working capital that will serve yet again as an in house cash flow substitute for short- and mid-term capital funding needs. Oddly enough, despite this so called "cautious approach" to inventory stocking, according to top down diffusion metrics, inventory levels are again creeping higher, meaning that going forward working capital will likely be a drain of cash once again, just like in the good old times.
Lastly, the historically biggest source of cash in the pre-Lehman years was debt issuance. This will once again soon be at the forefront of cash sourcing. For now, companies are merely refinancing record amount of debt as part of the 2012-2013 cliff issue. Very soon, they will start incurring incremental debt, and the debt/cash ratio will once again start to rise drastically. We anticipate non-fin companies to accumulate over $4 trillion in total debt by the end of 2011, just because they can, and just because as BofA earlier noted, they would be stupid not to take advantage of virtually zero cost debt at a time when Bernanke has pretty much guaranteed he will not raise interest rates ever.
The last big contributor to an expansion of cash at U.S. companies is the issuance of new debt. This source of cash predominantly came into play in 2010. As the economy stabilized and the credit markets, especially the bond market, opened up, companies took advantage of the opportunity to refinance near-term debt maturities. In the first nine months of 2010, U.S. high-yield debt issuance was a record high $170 billion, with another $300 billion of investment-grade debt issued. In our study group, total debt was $3,394 billion at mid-year 2010, up $42 billion since December 2009. This puts the ratio of debt to cash at U.S. corporates at 3.6 times, a little higher than at December 2009 (3.58 times) but otherwise the lowest it has been in the last five years (see Figure 3).
As for which industries are the biggest holders of excess cash, there are no surprises there:
The top cash-heavy U.S. industry sectors are technology, pharmaceuticals, energy and consumer products. In this section we list the cash leaders in these four sectors and compare the industry-wide cash to aggregate industry capital expenditures over the 12 months ended mid-2010. We list every company in these four industries that have more than $5 billion of cash and short-term investments. Cash at the other major industries is shown at the end of this section.
The table below looks at the individual tech companies responsible currently for the biggest cash hoard in the world:
A total industry breakdown is as follows:
Next up, we will attempt to determine just how much of this $1 trillion in total cash is held abroad. Per Moody's it is $250 billion. According to others, the amount is as high as half a trillion. If the latter case is valid, it would mean that of the actual $710 billion in cash ($233 billion in ST investments aside, which are far less fungible), almost 70% of the cash is non-touchable!
And even that aside, the bottom line is that companies have done nothing less than the inverse of what our Keynesian government is doing: they have cut all investment in future business to the benefit of building out a cash buffer (while the government has taken all future benefits to the present day courtesy of an unlimited taxpayer funded piggybank). And since this capex will need to be reinvested at some point, assuming some reversion to the corporate mean, it is only a matter of time before cash levels decline dramatically once again, only this time nominal debt levels, as pointed out previously, will be at fresh record high levels, courtesy of Bernanke's ZIRP insanity.
At this point, we dare someone to bring up the cash on the sidelines
theory: within a few months this will be as forgotten as the whole
"green shoots" propaganda fiasco.