As we mentioned in yesterday's "Link of the Day," Fitch Ratings released the report, "U.S. Corporate Cash Part I: Growth at an Inflection Point?" earlier this week. Today, we highlight more of the paper. Fitch writes, "Much has been made about the high levels of cash held by corporations, which have risen substantially over the past decade, as illustrated by the chart below [it show U.S. nonfinancial corporate cash holdings rising from under $0.4 trillion in 2000 to just under $1.0 trillion in 2008 and to almost $1.5 trillion in 2012], which shows total cash and short-term marketable securities of our very large sample. However, merely examining cash levels in the aggregate does not tell us much about their nature, distribution and future use."
The report tells us, "This report explores the distribution and trend over time of U.S. corporate cash holdings by examining a large universe of significant U.S. corporate cash holders, breaking down the universe by size and broad industry category.... The increase in cash levels has been broad-based, not just for the largest holders.... Historically and currently, the top 10 holders have approximately one-quarter of the total cash exposure of our broad universe, which consists of more than 1,000 different companies."
Fitch says, "Cash levels have increased over time, although the annual growth rate has been far from constant.... The median company increased cash reserves by as much as approximately 35% for just one year at the height of both the most recent downturn and the tech bust earlier in the past decade. Interestingly, the cash balance of the median company in our sample never falls over the past 20 years, despite experiencing large percentage gains during many years, especially in more turbulent periods.... Significantly, it does appear that, for the past few years, cash levels have not grown much at all for the "typical" company, as evidenced by year/year median growth rates approaching zero in 2011 and 2012."
They explain in a sidebar, "Corporates as engines and catalysts of globalization have become increasingly internationalized, with a significant proportion of their earnings originating from outside their domestic markets. As such, corporates can avoid paying taxes on foreign earnings not remitted to the U.S.... To fund their domestic activities and provide shareholder returns, companies can borrow at the holding-company level, despite having significant cash balances on a consolidated basis.... The technology and pharmaceutical sectors are typical examples of companies that are not inherently local in nature, in contrast to, for example, utilities, and, thus, tend to operate on a global basis. As a result, a large part of their cash balances is located outside their domestic market."
The Fitch paper continues, "While corporate cash and short-term holdings include those amounts held for future capital expenditures, acquisitions, dividend payouts and share repurchases, they also are necessary to maintain a certain level of business activity, including for transactional purposes and expenditures on maintenance and "routine" capital expenditures and the like. Consequently, there should be a certain structural element to cash holdings that varies with the level of business activity."
Finally, it comments, "While the relative figures show a general stabilization in cash holdings more recently, over the longer term, cash levels have outpaced business activity substantially. In addition to the tax incentive some U.S. multinationals have for holding overseas cash, all U.S. nonfinancials have two additional incentives to hold cash. First, inflation is at very low levels, lowering the opportunity cost of holding cash versus inventory, for example, making the assumption that the value of inventory held would keep pace with inflation. Second, capacity utilization is still somewhat below previous peaks and below the level (80%85%) historically associated with expansions."
