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Is The S&P Cash Horde Simply An Indication Of CapEx Underinvestment And Overleverage?
The 500 companies making up the S&P have recently glutted themselves with excess cash. Indeed, a time analysis of the "cash and cash equivalents" line of S&P companies indicates a significant increase in cash holdings: total S&P500 cash holdings have grown from $1.1 trillion at Q4 2008, to just under $2 trillion as of September 30, 2009. Many, including Goldman Sachs, have used this as a strawman for massive stock repurchasing power, and as an excuse to anticipate the "money on the sidelines" reentering the market. Yet when analyzed side by side other key business metrics, the massive cash hoard may merely be an indication of a return to leverage normalcy as well as a secular shift to chronic business underinvestment, which, of course, leads to a significant decline in top line revenue potential.
The first chart indicates the total accumulation of cash over the past 16 quarters by S&P 500 companies. With a trendline around $1 trillion, the total cash is now roughly $1 trillion above the comfort zone.
So far so good: it justifies Goldman's thesis that there is a ton of cash available for stock buybacks (of which we have so far seen very few notable examples), M&A and general investment. Yet let's take a look at the net debt of the S&P over the same time period, and here is where the first wrench in the sideline money tire thesis appears. Net debt (note, not total) has been progressively creeping higher. From a baseline of under $1.5 trillion in the same time period, this number is now at almost $2.5 trillion.
So let's index that and subtract cash from net debt: basically the S&P is now where it was 3 short years ago. All the excess cash could easily have come from the largess of creditors who have lent far too much to companies, which now will be forced to reduce net debt levels to historic, and feasible, levels. Indeed: the chart below demonstrates that after hitting a peak of nearly $1.4 trillion at the end of 2008, this spread is now back to merely late 2006 levels: a time when the stock market was about to enter its parabolic phase. It is impossible to say that on a relative basis, the cash is therefore at any remarkable level at all.
And here is where it gets even more interesting. A data series of the S&P 500 CapEx quarterly spend indicates that companies have largely forsaken investing capital in either maintenance or growth. The most recent quarterly read of $96 billion was the lowest since Q3 of 2006.
Another way to visualize this is by comparing the ratios of Total Cash to CapEx and Net Debt to quarterly CapEx. Both these metrics, at over 20x currently, are off the charts.
So yes, companies do have a ton of cash, an excess of almost $1 trillion. But this excess is simply a result of massive ove leveraging over the past 4 years, as well as recently chronic underinvestment in existing business, let alone growth. If companies were to return to historic trendlines, the cash offset used to pay down debt would promptly return the cumulative S&P cash balance to historic levels, with still a huge capital need to fund maintenance and growth CapEx. After all we all know there is little room for EPS growth from margin expansion, as anyone who could have been fired by now, has been. The only method left to grow multiples is to actually grow revenues. And it appears that this is very last on companies minds. Instead some of the larger ones have taken to M&A activity outright, which in the long run has a materially lower IRR than organic CapEx growth projects. Which begs the question: instead of paying down debt and investing in themselves, will companies be merely throwing away money chasing one failed acquisition after another. The next several quarters should provide ample data to make that conclusion.
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Gee, could it have anything to do with the (effective) forcing of nearly all companies into financing operating expenses via short term capital markets, and then totally destroying said capital markets? Payroll via cash in a drawer--it's baaaaaack!
This is what pisses me off when people say "banks will lend but no one who wants a loan is borrowing" with the implication that any sound business doesn't need financing. Idiots. The bank lending strike is killing the country. This cash "hoarding" is indeed the undoing of the past 30 years of financial management and business school practice, but it's not orderly and it's not OK. It's a slow-moving disaster. Cash in the 'old new normal' was for expansion, but in the 'new new normal' it is for survival. There is no expansion.
don't forget fas 166/167 at least as far as
the banks are concerned.....i suspect that it
will affect a number of non-banks as well....
the point is that many companies will be
forced to dramatically restructure their
balance sheets with formerly ex-patriate liabilities...as
a consequence reserve and contingency
requirements will change....which will pressure
cash holdings.
not sure if a return to mark to market is in
the cards but if so that will have a dramatic
effect on company solvency, viability, or
breathing room....
banks not lending is due in large measure to
these changes and many of them are hoarding
cash to survive the coming storm of 1/1/2010....
and yes, the business schools have produce
morons at an alarming rate....i don't know
if debt proliferation or b-school diploma
proliferation is more cancerous than the other...
I think you double deducted cash. The term "Net Debt" is defined as Debt minus Cash. Maybe thats not the case here, but why is it called Net Debt? What is being "netted" if not cash?
Yes, TD, could u clairfy what exactly is netdebt? I agree w/ anonymous above
Absolutely correct that net debt - less cash is a "made up" category. It is not a leverage metric in the traditional sense. I have simply used to demonstrate the increase in underlying debt, which even when you strip out cash (i.e., net not total) you would get a dramatic increase in leverage. All that chart indicates is that net leverage has increased by a comparable amount to the overall cash increase over the same time period. I should have added historic EBITDA to demonstrate that it really has been a leverage multiple expansion story rather than an organic growth one.
A good example of that ZH's DARPA report on LVS.
Equity and debt issuance has raised cash as insurance against another downturn. Even MSFT issued debt for the first time. They are not going to buy back shares, they need the insurance.
http://www.youtube.com/watch?v=SvoypBYG4nw&feature=related
Deleted, double, double post. Gasp.
Liquidity uber alles.
Out of curiosity, how much of this expanded cash hoard can be traced back to the increased excess reserves of our nation's banks?
I think there are a couple of thing going on here, and the OP and heatbarrier's comments hit on both of them.
First, many companies with higher debt and compressed free cash flows are using this as an opportunity to roll over existing debt, build cash reserves, and/or lower finanicing costs-- as insurance against another eocnomic downturn. You can put banks and other levered entities in this category. Many of these companies can use improving short term results, compressed risk spreads, and low rates at the long end to increase their life expectancies.
On the other end of the spectrum, you have entities that have discovered they are overcapitalized for the environment for which they are operating. Simply put, cash on the balance sheet doesn't deliver squat these days-- but borrowing is cheap and these companies can eventually invest in risker projects when the opportunities are ripe. Tech companies like CSCO fit this mode-- they may not be investing in cap-ex and/or R&D today, but they are making acquisitions-- and are piling on more cash to invest at a later date.
In a cash rich firm, if they prove to be "wrong", then the whole capital markets are screwed anyway-- what's "real" is that cash brings shareholders nothing-- and with dollar devaluation, its less than nothing. It's probably reason number one why Buffett is putting a lot of his chips into BNSF.
can you figure out how much of that $2 trillion in cash is at banks?
Depository Reserves have gone up about the same amount as S&P 500 Cash.
Easy to explain: Usually you can roll over your debt. Now the bank wants to be paid back. Sort of a forced layaway program for the big boys.
Is it me or does net debt not mean that cash has already been subtracted?