March 22, 2013 / 6:00 PM / 5 years ago

Huge U.S. corporate cash stash belies weakness -Citi

NEW YORK, March 22 (Reuters) - Corporate America’s cash stockpile is hovering near an all-time high of $2 trillion, but some of the money has come from a spike in borrowing by companies taking advantage of interest rates near record lows, Citi analysts said in a research report on Friday.

The vast sum of cash held by Apple and other top U.S. companies has fed the notion companies are financially strong, partially fueling the rally in Wall Street so far this year, they said. The reality is that much of that cash is concentrated among the biggest names.

“What we most take issue with is the implication that corporates have lots of cash to return to shareholders,” Citi’s high-grade credit strategists Jason Shoup and Sonam Pokwal wrote in the report, called “The Cash Myth.”

The top 20 companies in the Russell 3000 index had over $650 billion in cash at the end of 2012, accounting for 40 percent of all the cash and marketable securities of the index companies.

These top 20 companies, which also include Exxon Mobil , General Electric and Procter & Gamble, saw their cash balances grow between 15 and 20 percent last year, while the rest of the Russell 3000 had cash growth in a 0 to 5 percent range, the strategists said.

Cash as a percentage of all these companies’ total debt has actually fallen since 2010, to about 21 percent from about 23 percent. The cash-to-debt ratio is above a low of about 17 percent in the early 1990s but below the recent high of roughly 28 percent during the peak of the housing boom.

“While corporates do indeed have more cash on their balance sheets than at any time in the past, they also have more debt,” Shoup and Pokwal wrote.

The U.S. Federal Reserve’s easy monetary policy has investors looking for more yield and taking more risks. For that reason, Citi is forecasting yield premiums on U.S. corporate bonds over Treasuries could narrow by about 0.20 percentage point by year-end.

That said, the Fed’s aggressive stimulus has masked a deterioration in credit fundamentals, and the credit strategists cautioned against holding large positions in corporate bonds.

“We can’t help but get more cautious even though it’s extremely difficult to predict the timing of any potential sell off,” they said.

Barclays’ investment-grade corporate credit index has fallen 0.36 percent since the beginning of the year, but was still up 7.12 percent over the past 12 months.

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