Analysis: Corporate cash may not all flow back with recovery

LONDON Wed Jan 22, 2014 6:43am EST

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013. Picture taken August 2, 2013. REUTERS/Kim Hong-Ji

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013. Picture taken August 2, 2013.

Credit: Reuters/Kim Hong-Ji

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LONDON (Reuters) - When the corporate cash dam bursts, everything will be ok, right? Well, maybe.

Investors betting that the past year of more than 20 percent gains in western stock markets can be echoed, or at least sustained, through 2014 have long assumed that a corporate spending revival will nurture a building economic recovery.

The argument is simple. Years of banking crises, credit droughts and economic uncertainty have prevented businesses investing for the future. Instead, they have clipped costs, wages and jobs and built up huge stockpiles of cash rather than investing in new plants, staff, updated technology, equipment or acquisitions.

As the economic fog lifts, this idle, near zero-yielding cash will surely be put back to work eventually, they argue, creating a potentially virtuous circle of greater demand, higher growth, earnings and employment all round.

The problem, however, is that assumes cash stockpiling has all been due simply to a hiatus in the economic cycle. Many argue the hoarding is instead driven by more durable demographic trends and political reforms that are stirring corporate anxiety about exposure to soaring pension and healthcare costs as workforces age and government coffers shrink.

If that's true, then this brewing economic recovery may not release pent-up business cash on any scale close to that suggested by the eye-popping cashpiles.

According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 - more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years.

To be sure, some of this money has been eked back to shareholders via buybacks and dividends over the past year or so and there was also a small flurry of mergers and acquisitions late last year. But M&A as a share of market capitalization remains lower than it was in 2002, JPMorgan data shows, and share buybacks are also below historical averages.

The extremity of the cash bias remains.

According to this week's monthly fund manager survey by Bank of America Merrill Lynch, a record number of investors think companies are under-investing and some 58 of respondents want firms to deploy their cash on capital expenditure.

Standard Life Investments chief executive Keith Skeoch said this week that the extent to which firms put cash balances to work was key to the pace of recovery this year. "Without this, fears of the secular slowdown will persist."

"Whether corporate cash is put to work or not, however, is not just a question of economics. Politics remains just as important," Skeoch added. "We are still a long way from a strong socio-political consensus that might see animal spirits driving a world-wide investment boom."


Political reforms can take on many shapes and sizes, of course - those affecting systemic stability or short-term taxation. But changes to companies' long-term financial exposure to the claims of their own employees are pretty fundamental.

The annual 'Global Risks 2014' report prepared for the World Economic Forum by consultant Oliver Wyman - a report based on 700 industry leaders - cited corporate exposure to "skyrocketing" healthcare costs and "buckling" domestic healthcare systems as a key threat over the years ahead.

And the theme of corporate uncertainty about future liabilities and growing insensitivity to the economic cycle is spotlighted in a recent U.S. Federal Reserve Board working paper by staff economists Steve Sharpe and Gustavo Suarez.

Examining quarterly Duke University survey responses from some 550 chief financial officers over the past two years, the paper said companies are far less sensitive to interest rate changes than investment theory suggests and CFOs cite ample cash and historically low rates among the reasons for that.

Less than a third of firms said moves of up to 200 basis points in key borrowing rates up or down would affect their investment plans at all.

So what would get companies to hoard or invest these days? The two most commonly chosen drivers in the survey cited in the paper were "ability to maintain margins" and the "cost of health care."

There's little doubt a sustained recovery and greater earnings visibility could encourage some investment of the cashpiles. But it's clearly not all about the cycle and temporary corporate caution.

(Editing by Ruth Pitchford)

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Comments (11)
tmc wrote:
Yet half the country bashes any attempt to fix healthcare.
Great article. When the next financial crash occurs the obvious will no loner be deniable.

Jan 22, 2014 8:18am EST  --  Report as abuse
QuietThinker wrote:
Maybe CEOs like piles of cash, probably because they see an opportunity to pilfer it for their own pockets. As an investor with a long term view, I would encourage companies that cannot find profitable ways to invest their cash to cram as much as they can into their pension plans (no, not their executive plans, the real ones for the employees). This eliminates future pension expenses and greatly protects future profitability. In the meantime, the money in pension plans gets tax protections and can be invested in areas outside the main company business (where the CEO cannot seem to find a profitable use) – further reducing future pension costs.

Jan 22, 2014 8:44am EST  --  Report as abuse
nose2066 wrote:
Corporations have already invested heavily in new capacity. It’s just that the new capacity is in China (or similar low cost countries). Where did people think that all that extra steel and cement and copper went in the last decade?

There’s all sorts of production capacity sitting idle in China, waiting for the orders to pour in.

Jan 22, 2014 9:02am EST  --  Report as abuse
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