US Corporations Are Hoarding Cash, Experts Say

By Heide B. Malhotra
Heide B. Malhotra
Heide B. Malhotra
October 12, 2010 Updated: October 12, 2010

WASHINGTON—During the economic crisis, many companies have turned meaner, leaner, and yes, wealthier.

Corporate liquidity among U.S. corporations came in at a flush $1.84 trillion at the end of the second quarter, according to a recent Federal Reserve report.

But experts say that the amassed wealth has helped the U.S. economy little—it has not been used to improve the unemployment situation, which still hovers around 9.6 percent.

“Today’s Fed report presented a good news—bad news picture. On the positive side, total corporate borrowing increased by $50.4 billion during the second quarter. The bad news for the U.S. economy is that the increase is offset by the $75.5 billion in new direct investment abroad,” said Anthony Carfang, partner at consulting firm Treasury Strategies, in a statement.

“With so much cash currently sitting in corporate coffers, executives are under intense pressure to put that cash back to work in the marketplace. There have been charges of hoarding and accusations that these record cash levels are prolonging the recession,” said Cathy Gregg, partner at Treasury Strategies.

None of the more than 300 corporations surveyed by Treasury Strategies gave an explanation that would fit a common mold. Yet just focusing on the Fed’s summary number of $1.8 trillion creates a misleading picture.

About two-fifths of the corporations surveyed increased their cash position, while a little more than one-fifth of the corporations’ liquidity took a turn for the worse. More than half of the companies explained that the decrease was a matter of reduced cash from operations.

Responses from most companies suggest that improvement or conversely weakening in a company’s cash position is driven by sales revenue.

The implication of the survey results “indicates that cash levels have increased for many firms as a result of improvements in their day-to-day business [meaning sales] and independent decisions they have made for the good of their individual companies,” according to Treasury Strategies.

Cash levels have been in a constant flux since the beginning of the year for almost all surveyed companies, suggesting that companies are tweaking their liquidity position through many different avenues. Some invest the excess funds, some cut costs, some lay off staff, some aggressively market their products to improve sales, and some start paying their stockholders more dividends.

“‘Positive cash flow from operations’ was noted by 88 percent of companies as either their 1st or 2nd most powerful driver of increasing cash over the last six months. The second most often cited driver was ‘reduction of inventories’ at 32%,” according to Treasury Strategies.

The survey clearly showed that companies with healthy cash from operations continued to grow, albeit slower than in prior years. On the other hand, companies in which business had slowed down found it more and more difficult to reverse the slump in sales.

But it is not quite so clear-cut. In a large number of companies, sales had nothing to do with decreasing liquidity. Close to 50 percent of the companies with declining liquidity went on an acquisition spree or capital expansion of existing operations, decreasing available cash.

Treasury Strategies suggests that “the number of companies bleeding cash is going down—a positive sign that business is improving.”

Firms on the Downslide

“This month again showed a larger group of public firms with deteriorating short term default probabilities,” said David Boldon, the Washington D.C. representative of the Honolulu-based Kamakura Corp., a global risk management firm.

Among firms that deteriorated more than 1 percent, based on the Kamakura Troubled Company Index, are the National Bank of Greece, Sharp Holding Corp., First Bancorp Puerto Rico, and Insight Health Services Holding Corp., a provider of diagnostic imaging services.

The Kamakura Troubled Company Index is a percentage of firms that are having a difficult time surviving harsh economic conditions at a given point in time.

The 2010 financial statements of Insight Health Services group shows a net lost of $32 million. The company’s situation has worsened since fiscal year-end 2009, from a net loss of $20 million. The net worth of the company is in the red with a $184 million stockholder deficit in 2010, having deteriorated from a $154 million deficit in 2009.

Despite the troubling financial condition of Insight Health Services, it announced the acquisition of eight imaging centers in the United States in July.

The number of companies moving toward default of their outstanding debts increased in September by almost 1 percent to 9.93 percent according to the Kamakura Troubled Company Index.

The good news it that the Index has leveled off significantly since it peaked in March of 2009, with 24.3 percent of companies sliding toward defaulting on their outstanding debts.

In May 2006, the Index was at its healthiest at 5.4 percent versus an all-time high of 38 percent in September 2001.

Directors Feeling Pinch

Despite corporations improving liquidity, the income of directors at the largest U.S. firms has increased by only 1 percent over income earned in 2008. Before the economic upheaval, directors generally could expect an annual income increase of 10 percent, according to a recent press release from Towers Watson, a risk and financial management firm.

More and more companies also no longer pay outside directors for showing up at board meetings. In the past, most companies paid fees for attendance, while today 60 percent of all companies pay a fixed retainer fee.

“While most companies are not increasing the level of pay for their outside directors, they are taking a closer look at the various components of director pay programs,” said Doug Friske, head of executive compensation consulting at Towers Watson, in a recent press release.

“Companies are also evaluating how much directors should be paid in cash versus equity … One thing that is clear is that the current state of director pay will continue to evolve in light of changing responsibilities, recruitment challenges and time commitments placed on directors,” Friske said.