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Michael Baxter

Corporate cash pile soars as investment drops

Written by: Michael Baxter on May 24th 2016

Category: Thought for the day

US companies are sitting on more cash than ever, according a new report. This may be one of the single biggest economic issues of our day. 

One point six eight trillion dollars, that’s a lot of cash. And it just happens to be how much cash was held by US non-financial companies at the end of last year, or so says a new report from Moody’s. The technology sector accounted for 46 per cent of the total, while the top five cash holders were Apple, Microsoft, Alphabet, Cisco and Oracle, making up just over one third of the total, or $504 billion. Apple’s cash pile was worth $216 billion.

Although this was the highest figure ever recorded for US non-financial cash holdings, the total figure has topped $1.5 trillion for the last three years. In 2009, cash holdings were less than $1 trillion, and in 2007 cash holdings were barely worth more than one third of the amount at the end of last year.

So it has been quite a time for rising cash holdings.

A mere 50 companies accounted for $1.2 trillion of the total.

Moody’s reckon that over the next few years the technology sector will grab an even higher proportion of total cash holdings. In 2015, the sector generated 63 per cent of the total non-financial free cash flow, from 37 per cent in 2007.

You can put it another way, for cash generation, technology is becoming ever more important, or if you want to use a bit more hyperbole, technology is taking over the world’s cash.

Yet while cash holdings grow, investment seems to be falling, of the top 50 cash holders, capital spending fell by three per cent to $885 billion, while net share buybacks fell by seven per cent to $269 billion.   Dividends were up four per cent, to $404 billion. Acquisition spending rose 43 per cent to $401 billion.

Say it like this: while cash holdings soared, capital spending fell, but spending on mergers and acquisitions rose sharply.

By my maths, and taking figures from here, total iPhone sales to date add up to 4.4 billion. So that means that if you ignore, iPad, iPods, Macs and other Apple products, each iPhone sold contributed $50 to that total.

Now I am a fan of Apple, and I love my iPhone, indeed I am on my fourth or maybe fifth model, but the idea that the various iPhones I have owned have contributed some $200 to the US corporate cash pile makes me feel a little uneasy.

It turns out that roughly $1.2 trillion of cash pertaining to US companies sit in bank accounts overseas, as US companies try to reduce corporation tax bills.

And while cash holdings rise, debts rise even faster. According to the FT, total corporate debt rose to $850 billion last year, hitting $6.6 trillion.

So it is not that US companies have so much money that they don’t know what to do with it. Indeed, for low rate junk companies, the cash to debt ratio has reduced to 12 per cent, from 20 per cent in 2010.

But of the top 25 cash hoarders, cash holdings are greater than debt obligations.

For me, the real story here is how cash holdings are being squeezed into less and less companies.

Technology is disrupting business, but in a world of technology, we often see natural monopolies. Take Uber as example, the more taxis that form part of the Uber service the more effective the service.  But the service will only be at optimal size when all taxis in the world are part of the Uber network. You could make the same argument for social media, the more people who sign up to Facebook, or Twitter, the better the service. If some of your friends use a different social media network, then that can make things difficult.

What we really need is for companies to invest their cash, rather than hold onto to it.

When companies hold onto cash, leaving it in bank accounts, wherever those bank accounts are, only one of two things can happen. The money being held by corporates either pushes down on interest rates, and makes it easier for other companies to borrow, or it effectively drains out of the global economy.

That is why the rise of the technology giants is a possible reason, but not the only one, why there is a global savings glut worldwide, and why it is that despite years of record low interest rates deflation remains a danger, and growth in global GDP is lacklustre. My big fear is that tech companies are going to take up an ever bigger slice of global cash holdings. And that may be a very big problem.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Tags: Corporate cash piles, tech cash, global savings glut

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