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.