Why isn't "hoarding" a bad word when it's paper money? Where are the critics to flail on the Corporatist "Dream Robbers" for not disgorging their paper? Why don't silver mines hold their reserves in the metals as Eric Sprott wisely suggested? We strongly believe they were sternly instructed Not To by the Banking Cartel. Discussions beyond that are just smoke.
By Heide B. Malhotra
Epoch Times Staff Created: December 22, 2011
Research of 1,000 U.S. corporate giants confirmed in 2011 that many of the largest U.S. corporations were stockpiling cash instead of pumping it back into the flailing economy.
“The largest U.S. companies are hoarding tremendous amounts of cash at present, in many cases borrowing to do it, while smaller companies remain starved for capital,” announced The Hackett Group, a business consulting firm, in a 2011 research release.
Based on corporate annual reports, these corporations accumulated a total of $835 billion in cash by the end of 2010 and $850 billion by mid-2011.
Cash reserves held by some of those corporate giants jumped by 75 percent between 2005 and 2010, 33 percent within the past three years, 6 percent between 2009 and the end of 2010, and by June 2011, another 7 percent.
In a December press release, Hackett cautions against any optimism that readers may feel when reading the aforementioned data. “Cash hoarding continues to be the trend. But high cash balances don’t necessarily indicate strong performance,” Hackett states.
Cash is not necessarily a predicator of significant profits, but could be attained by taking on more debt, increasing some of those firms’ liabilities and obligations to banks. Hackett suggests that the liabilities of these firms have increased more than 30 percent since 2005.
The largest U.S. companies are hoarding tremendous amounts of cash at present, in many cases borrowing to do it. The Hackett Group
“Surprisingly, it appears that borrowing is also a significant factor behind the high cash reserves, particularly for AAA-rated companies. … According to the research, companies may be borrowing to get cash on their balance sheets simply because the cost of borrowing is low,” Hackett said.
Research results and discussion with executives indicate that hoarding of cash is not for the sheer joy of holding on to funds, but because of apprehension of a deteriorating economic environment, lack of confidence in a long-term economic recovery, and the precariousness of the global markets.
Investing in other corporations is no longer as profitable as it was a few years ago. Investment experts suggest that the high-yield investment market has dried up and those investments that are still on the market are often out of reach, given the cost of obtaining them.
Holding cash could also mean that executives are prowling the market for flailing companies that could be brought back to life. Hackett suggested that “companies may also be reserving cash in anticipation of M&A [merger and acquisition] activity.”
The companies have many reasons for holding on to cash, with one being the low cost of borrowing. Companies are also paying higher dividends to their shareholders and buying back outstanding stock.
By the end of 2010, America’s corporate giants also had become savvier in their business practices by collecting obligations from debtors up to 19 days faster and demanding more than 10 days in longer payment terms from their suppliers. At the same time, corporations reduced inventory levels by 77 percent, keeping the levels at a minimum.
However, with earnings improving, companies’ management are returning to their old ways of doing business, with accounts receivables increasing significantly, the granting of longer payment terms, and an increase in inventory levels.
“In response to economic challenges, they [company management] quickly lost focus once revenue growth returned, and the improvements they made were not sustainable. Companies are now taking their eyes off the ball when it comes to efficiently running their business,” Hackett said in its latest research release.
Corporate Cash Illusion
“Here’s Why Corporate Cash Hoarding Is A Myth,” reads the headline of a November article on the Business Insider website.
The article decries press announcements and releases by analysts who interpret data about corporate cash positions from a very narrow point of view without looking at the full corporate financial position.
“But the story is not as simple as that. Though it seems to have escaped nearly everyone’s notice, companies have piled up even more debt lately than they have cash. So they aren’t as free to spend as they may seem,” according to the Business Insider article.
In the real world, when a company borrows, the lender places a number of restrictions in the form of caveats on the firm, such as how much cash the company is supposed to hold, how much borrowing a firm may undertake, and how much additional security the firm has to provide. The lender wants to ensure that in the case of a default, it has all the bases covered.
“American business is awash in cash like a man who borrowed from a bank is rich. He may have plenty of money in his pocket, but he still has to return it,” the Business Insider article states.
Selected corporate information shows that Pfizer Inc. increased its cash and short-term investments by $2.5 billion from $25.5 billion at fiscal year-end (FYE) 2007 to $28 billion at FYE 2010. At the same time, the company increased its combined short- and long-term debt by $31 billion, from $13.1 billion at FYE 2007 to $44 billion at FYE 2010.
The Business Insider article indicates that PepsiCo. Inc., Hewlett-Packard Co., and Wal-Mart Stores Inc. increased debt by $22 billion, $16 billion, and $13 billion, respectively, more than they increased their cash position.
Logically, a comparison between profits and cash on hand growth would be a better indicator if corporations are hoarding cash. Analysis of cash growth versus annual profitability between FYE 2007 and FYE 2010 indicates that cash increased less than the annual profit, resulting in a cash deficit instead of excess of cash.
“If cash balances are growing faster than profits, wouldn’t that be a strong indication that corporations are in fact ‘sitting’ on their cash?” argued an analyst from the CFA Institute in an article on the Seeking Alpha website.
Hoarding Versus Business Practices
“Corporate Cash Hoarding Reflects Inadequate Demand,” suggests an article on the Think Progress website.
Demand for products has steadily declined, and new orders have declined steadily since the onset of the financial upheaval. Economic theory suggests that when demand declines, employees are laid off, corporations go on a belt-tightening spree, and cash is accumulated to help the company survive rainy days.
Lately, no real blockbuster products have hit the market, as corporate giants and smaller sized firms no longer invest their liquid assets (mostly represented by cash on hand) in research and development, which results in a higher cash position.
Inventories have shrunk to a minimum, releasing cash to be used for other activities or kept in the company’s coffers.
“American firms pile up more highly liquid assets rather than investing in expanding business activities,” according to the Think Progress article.
