Market experts suggest that corporate financial health has improved significantly over the past few years. U.S. companies are holding approximately $588 billion cash outside of U.S. borders, according to a JP Morgan study.
In March, an Investors Service Special Comment by Moody’s stated, “US non-financial companies rated by Moody’s held $1.24 trillion in cash as of December 2011, up 3.0% from the record level of $1.20 trillion at the end of 2010.”
Moody’s named Apple Inc., Microsoft Corp., Cisco Systems Inc., Google Inc., and Pfizer Inc. as the five non-financial companies that hold about 22 percent of the total U.S. cash balances in foreign countries, an increase of $69 billion from the 2010 cash balance.
The pharmaceutical sector held $183 billion in cash at the end of 2011 with Pfizer Inc., Johnson & Johnson, and Amgen Inc. holding the most cash, according to Moody’s. One other cash-rich sector is the energy sector with Moody’s naming Chevron Corp., Exxon Mobil Corp., and ConocoPhillips as “sitting on substantial balances.”
Foreign cash holdings most likely will not shrink but increase, as corporations have not convinced many U.S. politicians to support tax law changes. However, Moody’s suggests that “aggregate spending in 2012 of about $1.4 trillion on capital investments, dividends, acquisitions, and share buybacks, similar to 2011 levels” might reduce the corporate cash pile.
Cash Holding Patterns
“U.S. firms hold more cash now than in the late 1990s relative to similar foreign firms. The increase in abnormal cash holdings is not uniform across firms as it takes place mostly for multinational corporations,” according to a Fisher College of Business Working Paper released in May.
The Working Paper confirms that U.S. companies with no operations outside the United States do not hold cash in foreign countries. Global companies with more than 25 percent of their sales outside the United States have increased their foreign cash holdings throughout the years. In 1998, cash holdings amounted to $157 billion, jumping to $835 billion by 2010.
The amount of cash held outside of the United States is similar between foreign multinationals and U.S.-based multinationals.
“Part of the growth in cash held by multinationals is due to their increased economic importance in the U.S., but the cash holdings of multinationals increased by 433% while their assets increased by 205%,” the Working Paper stated.
The increases for domestic firms were not as dramatic, as their cash holdings increased by 66 percent and assets by 40 percent.
The findings, which were said to need further research, suggest that multinationals do not hold cash abroad solely because of unfavorable tax treatment in the United States, but because the firms are involved in significant Research and Development (R&D) activities.
“The increase in cash holdings of multinationals is strongly related to their R&D intensity, so that multinationals with no R&D expenditures do not have an increase in abnormal cash holdings compared to domestic firms with no R&D expenditures,” according to a post by the Working Paper authors on the Harvard Law School Forum website.
U.S. Corporations Less Robust Than Suggested
“Yes, corporations are holding record amounts of cash from their corporate profits. But few are talking about the record amount of corporate debt they’re holding on their balance sheets,” according to a June article on the Profit Confidential website.
Corporate net cash flow has been increasing from $1.77 trillion in the last quarter of 2009. The Federal Reserve Bank of St. Louis recently reported that corporate net cash flow was at $1.84 trillion after the first quarter of this year.
The U.S. corporate debt was $8,167 billion by the end of the first quarter in 2012, up from $7,656 billion at the end of the first quarter 2011, a 6.67 percent increase, according to the Federal Reserve Flow of Funds Accounts of the United States.
News reports of defaults show that during the first quarter of 2012, bond issuers defaulted on 10 bonds valued at $4.1 billion. Three high-yield corporate bond issuers defaulted in February on bonds valued at $600 million, and in March, another four issuers defaulted on bonds worth $1.6 billion, according to a Fitch Ratings report.
Two of the 10 companies, one from the energy industry and the other from the paper and containers industry, missed the March payment. Four companies—Eastman Kodak Co., Global Aviation Holdings Inc., LSP Energy LP, and Centrais Eletricas do Para SA—filed for Chapter 11 bankruptcy.
“As corporations mysteriously continue to pile on more corporate debt than needed, their cash amount from corporate profits is actually dwindling. … At the end of March 2012, corporations were holding record cash of $1.74 trillion from corporate profits. That works out to $4.65 of debt for every $1.00 of cash held,” the Profit Confidential article said.
Corporate profits are not keeping pace with corporate debt. Having cut costs over the past several years through layoffs and other cost reduction methods, corporations have little room for further reductions. Cost reductions allowed for an illusory improvement of profits. With sales not improving, corporations will find it more and more difficult to pay for corporate debt.
“So, less cash on hand due to lower corporate profits, yet corporate debt continues to climb while capital investment falls…
“This is not a recipe for economic growth. … It will mean even more job cuts, as corporations are forced to cut more to pay their debt from their dwindling corporate profits,” according to the Profit Confidential article.
Companies Facing Bankruptcy
“I’ve come across 27 companies that are starting to sweat. They all carry short-term loans (due in 12 months or less), and right now, they don’t have enough cash on hand to come up with the funds if the bankers come knocking,” a mid-June article on the Street Authority website stated.
For example, the article states that PC Mall Inc., Reed’s Inc., Covenant Transportation Group Inc., and Associated Estates Realty Corp. are short of cash, and it appears that they don’t have enough cash to make their interest payments. Thirteen companies still have enough cash on hand to make interest payments. But if orders don’t materialize and sales don’t improve, their survival is at risk.
“If you own any of these stocks, then consider selling them now,” the Street Authority article suggests, referring to the 27 companies reviewed.
A June article on the 24/7 Wall St. website reports that 10 American brands will no longer exist by 2014.
It named American Airlines Inc. on top of the list, which no longer is competitive despite 30 years of surviving in a challenging environment. Two more companies on the list of disappearing American brand names are Research in Motion Ltd., the company that produced the BlackBerry, and Avon Products Inc., a beauty products company.
“This year’s list reflects the brutally competitive nature of certain industries and the reason why companies cannot afford to fall behind in efficiency, innovation or financing,” the 24/7 Wall St article said.
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