Citi Destroys The 'Cash-Hoarding-Corporations-Should-Return-It-To-Shareholders' Meme

Tyler Durden's picture

Authored by Jason Shoup & Sonam Pokwal of Citi,

The Cash Myth

When it comes to popular finance myths, cash hoarding by corporates may be one of the most perpetuated. It's not that the data is wrong; US companies are holding more cash on their balance sheets than at any time in the past, as a report by Moody's this week notes. What's misguided is the narrative, in Citi's view, in particular among equity investors. What they most take issue with is the implication that corporates have lots of cash to return to shareholders. Indeed, there's plenty of data to the contrary that challenges the prevailing notion that corporates are the picture of good health.

For a start, dig just a little deeper into the specific companies contributing to the rise in corporate cash balances and it's evident that there's more to the story than meets the eye. For instance, using the Russell 3000 as a universe, we see that the top 20 corporates with the most cash on their balance sheets at the end of 2012 hold over $650 billion - almost 40% of all the cash and marketable securities of Russell 3000 companies. And among those top 20 companies, cash balances have grown between 15-20% for the last year, while the rest of the companies have seen far lower growth in the 0-5% range.

What's more, as the recently released Flow of Funds data makes clear, cash growth has lagged behind EBITDA growth and, more importantly, the accumulation of debt. So while corporates do indeed have more cash on their balance sheets than at any time in the past, they also have more debt.

As always, the nominal numbers matter far less than the relative ratios. Take cash as a percentage of total debt. That ratio is rapidly plunging and, at least to our minds, implies that further shareholder friendly behavior will likely be funded with more borrowing at the margin (see figure).

Similarly, we'd argue that corporate liquidity isn't nearly as great as many pundits have advertised. The idea that investment grade corporations have taken advantage of low rates to extend their maturities isn't quite accurate. While it's true that many corporates have meaningfully reduced their dependence on the commercial paper market in the wake of the credit crisis, companies as a whole have made remarkably little effort to issue a greater percentage of their fixed rate debt in longer maturities.

We think there are two reasons for this behavior. Either the demand simply isn't there for a significant step up in long duration supply and issuers are being told as much from the folks in capital markets or, more likely in our view, the attraction of the steep yield curve is just too great. Indeed, CFOs have been able to accomplish a remarkable sleight of hand in being able to add debt to the balance sheet without incurring a corresponding rise in their interest expense these past few years, but that illusion would be ruined if all the debt had instead come at the 30yr point.

Many investors argue, of course, that releveraging of this sort is an intended consequence of QE and, provided the companies use the funds in a way that contributes to growing the economy, the costs are likely to be minimal. After all, it's not as if interest coverage ratios are suffering as a result.

Yet we're not so sure that the increase in debt (and leverage) and decrease in liquidity will go indefinitely unpunished. For a start, the surge in shareholder activism this year has made it harder for risk-adverse CFOs to continue with a measured approach to levering the balance sheet—a fact that the agencies are increasingly taking note of. Indeed, the days when leveraging activity wasn't done at the expense of bond ratings are quickly becoming a thing of the past.

But more broadly speaking, the really troubling aspect to the deterioration in corporate fundamentals is that valuations do not appear to reflect reality any more. While the disconnect between the two is not on the level of Europe (where most EU economies are in recession, corporate fundamentals are in bad shape, and yet credit spreads haven't been tighter in six years), we believe that in a similar way US investors have been forced to ignore the factors that have historically driven credit spreads.

In that respect, the Fed deserves quite a bit of credit in cajoling investors into abandoning credit analysis. And there's no reason why easy money can't continue to exert its influence on valuations for an extended period of time or why the disconnect can't grow measurably larger.

But even if spreads are more likely than not to end the year tighter than current levels, that doesn't mean chasing every last bit of tightening is a prudent strategy from a risk perspective. For as the disconnect between fundamentals and valuations grows, so does our unease that IG spreads could snap back to reality given a nasty enough catalyst. In recent days, the goings on in Cyprus and Italy have at times looked like they could potentially fit that bill, even if the market has eventually ended up dismissing those initial concerns.

So as the tail risks simultaneously grow in probability and severity, we can’t help but get more cautious even though it’s extremely difficult to predict the timing of any potential sell off. Frankly, the asymmetry in credit is such that it’s hard to continue to favor an overweight unless the probability of a correction is incredibly low.

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ParkAveFlasher's picture

At Any Price, Losers.

Groundhog Day's picture

if only we can get our dividends in gold and silver....


HelluvaEngineer's picture

AAPL needs all the cash it can get, because it's about to overake RIMM as the #1 loser-old-man-phone company.

CrashisOptimistic's picture

Finally, Citi has something right.

Introduction to CFO  -- when rates are 0, BORROW MONEY and a helluva lot of it.  CFOs are always looking to raise money at the lowest cost of capital possible.

Rates have been 0 and so the cash on those balance sheets is borrowed money.  Give it to shareholders and the stock price should drop severely as it becomes clear the companies can't repay the debt when it matures.


bnbdnb's picture

This is why interest rates will NEVER go up again.

Racer's picture

If I borrow a lot from Bank A and put it in Bank B, then I can also say to anyone that I have a big cash hoard..... just like the companies

bnbdnb's picture

My available credit has multiplied by 50 in just the last year. I'll keep expanding it.


Kirk2NCC1701's picture

Normally in Monopoly, the game ends when only one person is left with all the cash and properties, because the rest has no more cash.  But of you read the fine print, the Bank can issue more money -- at will -- as long as it wants to, as long as they keep tabs on this and eventually settle up when it's time.  Thus, the money and the game just keep on going, just like in real life.

Racer's picture

Does Monopoly supply a printer or is it even more like real life with no paper money and you only have digital 1s and 0s to be  'printed' at will

Colonel Klink's picture

Nope you have to supply your own paper and ink.  If you care to use a computer to keep track of the tabs like todays banking, then yes it would be 1s and 0s.  Everyone changed in their money for a number at the bank.  Just like real life, except both are just imaginary when the number is supposed to count.

yrbmegr's picture

No, you just get a piece of paper and write $100, or whatever, on it.  Just like in real life.

hooligan2009's picture

there is one winner and the bank, who are left playing

the banks have no differentiation, ergo they are one bank, welcome to communism

..the monopoly bank is of coruse the Fed

hooligan2009's picture

seems that the article does not go deep enough.

cash balances are what they are simply because corporates are holding cash offshore in low tax jurisdictions Cyprus..that is, probably not Cyprus but probably the Caribbean, Ireland, Luxembourg etc etc.

we are supposedly seeing record profits from corporates...follow the money...are we seeing record tax receipts? if not, why not? my guess is tax and regulatory arbitrage and tax avoidance. 

after all, corporates are told all the time that "they didn't make that" and of course, the corrollary of that is "then we won't pay tax on profits then"

LawsofPhysics's picture

Maybe, does it cover the debt and exisiting counterparty risk (i.e. outstanding CDS)?  My guess is no fucking way.  Many things can appear great so long as no one makes that margin call.  Moreover, if you don't mind, I'd like to see the underlying collateral for all this debt.

hooligan2009's picture

spot much of the cash is margin money, where is the cash domiciled and is the derivative p/l secured on cash or government (the right governments of course) or on corporate bonds.

there's not even an attempt to split this between companies like apple (and where there cash is) how much is required for reserving by banks etc etc..pretty piss poor in depth, but at least its a start..maybe the writes will actually earn their money by goi g into details or perhaps they will remain content to complete under grad economics work

ArkansasAngie's picture

If they get worried about their banks going Cypriot on them, they might rather pay the tax and bring that money home.

walcott's picture

Easy to fix. let gold and silver blast off and waste their turkey injection balance sheets.

These jerk-offs bailed out all these fucked up companies and they all just held the cash.

Never creating one fucking job.  What an absolute disaster.

Bernanke and the old lizard geezer Greenspan are real assholes they fucked this shit up royally.

There isn't any fucking recovery you fucking liars!

ozzz169's picture

Try reading and understanding what you read... this article explains all the cash, as for banks, they have to continue to make shit tons of money to deleverage, so when the shit really hits the fan they dont become insolvent, this is all been done before.  The real problem is that these idiots at the fed cant remember 30 years ago when there was high unemployment and high inflation, and still preach that they can just print money cause there is "slack" in the economy, but truth be known they know all this and are simply lying to keep people from panicking, they are printing the shit out of money to deleverage the economy, and I think a big part of it is a work around for mark to market. the fed does not have to mark to market so it bought all the shit assets from the banks, and I think they will just hold them forever and that's why you will never see an audit, cause it would expose this. Also gold and silver are probably priced fairly and could easily be OVERPRICED, what all these gold bugs (I hold some as well) dont understand is that the huge amount of excess leverage in the world economy is DEFLATIONARY, and that holds all this money printing in check, and the only reason they are able to get away with it. The main question is if you believe the fed will be able to completely stop the deflation and inflate, which they probably will, but if there is another crisis, not even the fed can stop the deflation, (in last crisis gold dropped from 1000 or so to under 800, and silver dropped like 60-70%.

Monkeyfister's picture

Well, if not to the Shareholders, or Bondholders... And you'll pardon me for noticing, but... Some fucking JOBS and/or liveable WAGES would be nice for creating that DEMAND, oh great and nobel, self-sacrificing JOB CREATERRRZ. 

Oh. That's right. There's a Black Democrat in the White House, so y'all are spendin' some quality time in Galt's Gulch.

Petty bastards.

LawsofPhysics's picture

Please, humanity isn't just another ponzi, it's the ponzi.  Remind me, what product or service of real fucking value do any of these paper-pushers create?

LawsofPhysics's picture

Simply put, the earth is awash in debt, period.  It only get's worse from here unless the bad debt is cleared.  Doing so would require restoring the rule of law and contracts.  With so many feeling like they are owed so much, my bet is on world war first.  Same as it ever was.  Fraud is the status quo, posseession is the law.  Most simply have no clue and will not until the EBT cards stop working.

Bobportlandor's picture

Can you imagine when historians look back and read ZH and all other media outlets writeup and comments what a treasure trove of information will be available.

There isn't a stone unturned that someone could point to and say we didn't know/ if only we had known.

And when the first one comes out and say "were going to fix it so it will never happen again" shoot them.


Seasmoke's picture


What would Jobs do ?

ozzz169's picture

Jobs was a hack... apple will be the next microsoft, because eventually customers wake up and realize you were gouging them. he should instead have licensed out ios and shut down competitors from developing, instead they let google gain a foot hold and then surpass them. every smartphone could be running ios and apple making a nice little profit with minimal costs to it. They also really screwed up forcing people to use the horrible itunes for everything, google did it the right way.  

q99x2's picture

Oh boy. I got the Snorgtee ad. Not the missing camel toe but close enough.

Monsanto must have had to pony some of their cash up to get their "Monsanto's going to kill you and the Government is going to force you to let them" bill tacked onto the US budget that the Senate just passed. Don't know how much it cost them to be above the entire legal system in teh US of A but it probably wasn't cheap. I think they called something like the Fairness in Farming bill.

Clowns on Acid's picture

How about an ETF or s stock that pays a dividend in Physical PMs? Or a corporate bond whose coupon is linked to the price of PMs ?

The Issuing entities could hedge / manage those PM dividend / coupon payments pretty easily.

The supposed cash hoarding by Corps is just another indication of the misallocation of capital caused by Bernank and his skank, ole Yellen.


q99x2's picture

What can you buy with BitCoin. Well you can buy a house with BitCoin.

Canadian house first on sale for Bitcoin currency

ozzz169's picture

good article, don't know why any of the pundits cant be cleaver enough to point out the cash/debt ratio is lower then before, so in reality the cash is completely justified, and in fact might be on the low side.

benbushiii's picture

The FED should realize that printing more money or driving rates down actually causes job losses, destruction of assets, and compresses margins.  Companies may have large amounts of cash, but they actually have larger amounts of unrealized losses on their balance sheets.  By forcing rates lower across the curve, outstanding debt increases in value and in most cases cannot be retired early.  If the correct accounting rules were in place, many corps. would have to mark these large unrealized losses against earnings.  It does not matter how much cash they have.  The debt remains outstanding at higher rates. The cash earns nothing.  This also causes a further dislocation in the employment markets since newer technology and newly created companies can raise money cheaper to buy newer updated manufacturing equipment that requires fewer works and is much more efficient.  Existing corporations, plant and equipment are obsolete and margins get squeezed, people get laid off.  So the lower rates go the higher the unemployment rate, and the barrier to entry for new competition increases lowering profit margins.  A vicious circle.  The FED has created a situation whereby the financial elite benefit from carry trades against the curve, and manipulate assets; but the rest of corporate America, in fact the rest of the world is caught in margin squeeze and profit spiral.  Existing businesses basically get forced out of business because they have existing debt outstanding that cannot be called; creating a fixed cost that works against them to a greater and greater degree as rates drop.  The model is broken.

Sockeye's picture

Excellent point. Thanks for that.

WillyGroper's picture

The Fed does realize. Therein lies the problem.

shuckster's picture

Cheap money is making all forms of manufacturing obsolete, so that everyone is becoming a lender and no one is making anything anymore. You would think corps would be deleveraging given all the cheap money floating around, but they're not. They're using the cheap money to pump up their balance sheets which in turn gives them more access to cheap money. They've all discovered that you don't need to work to make money anymore, just borrow. Its easier on the back and the brain. But when the cheap money spiggot is closed, their assets are going to tank in value and they're going to have to liquidate everything, and then their business is going to be completely gone. AAPL is a great example - existed since 1981 with no debt and then all the sudden, in the last 4 years its debt shot up from $16 billion to $57 billion. Its expenses have followed, multiplying 4 times. What happens if revenue cannot cover these expenses plus debt? It will have to liquidate assets. This will cause its assets to drop in value because the return on assets will shrink and the whole company will get sucked up like toilet paper in a vacuum cleaner. And the same thing will happen accross the corporate spectrum. 

tony bonn's picture

i had to give this article a five even though it took 6-8 months to show up as an answer to my question regarding the quality of the cash.....not only is it encumbered by debt, but the wealth is not spread evenly....

if a country has 10 people with 1 making 1 million usd per year, and 9 making 0 usd per year, what is the average income? what is the median income? did everyone get the correct answers? i knew you could!

for extra credit, what kind of distribution does it have?

yrbmegr's picture

They will need that cash to pay the wealth tax coming to the countries in which they hold that cash.

walcott's picture

Easy to fix. let gold and silver blast off and waste their turkey injection balance sheets.

These jerk-offs bailed out all these fucked up companies and they all just held the cash.

Never creating one fucking job.  What an absolute disaster.

Bernanke and the old lizard geezer Greenspan are real assholes they fucked this shit up royally.

There isn't any fucking recovery you fucking liars!

Bear's picture

The FED did it to us, period! ... but they continue unabated.

When the serious financial crush comes the FED will blame it on the economy and say "We tried our hardest: low interest rates, buy-backs of MBS, liquidity injections, and QE to the Max, but demographics, speculation, irresponsible banking (ironic that they will use this argument, as they are a bank ... but they will), and a sluggish economy caused our (heroic) measures to fall short.

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awakening's picture

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