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Companies are sitting on the highest percentage of cash since the 1960s
06/21/2010 4:15 pm EST
For part of the explanation, look at where companies are putting their cash. With record levels of cash on company balance sheets U.S. companies aren’t putting it into expanding production, buying new equipment, or building market share.
Instead they’re buying back their own shares or simply leaving the cash sitting on their balance sheets, the Financial Times reports.
So far in 2010, companies have announced 33 new buy backs for $178 billion, according to Bank of America’s Merrill Lynch unit. If buy backs were to continue at the same rate for all of 2010, the total would come to almost $900 billion. That would be the most since 2007.
But that level of buying, high as it is, isn’t enough to soak up all the cash companies are generating. Because companies have cut costs and reduced inventories even as profits have recovered, cash balances have climbed to $1.84 trillion, according to data from the Federal Reserve. (The Fed’s data excludes cash at financial companies.) That puts cash at the highest level as a percentage of assets since the 1960s.
Two things seem to be generating these trends.
First, companies are worried enough about the financial markets seizing up again that they want to sit on more cash. Ratings companies such as Standard & Poor’s are contributing to the tendency by paying close attention to cash balances in their credit rating reports. (Now, they’re getting tough!)
And second, companies are announcing buy backs to give themselves more flexibility in an uncertain economy. Announcing a buy back scores points with investors and Wall Street and usually companies don’t pay any penalty with that audience if they quietly don’t actually buy all the stock they announced they would. The result is a boost to share prices that still leaves the company free to actually put its money elsewhere if the economy turns out to be either better or worse than projected.
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