Apple, criticized by some investors for hoarding cash, announced to shareholders’ delight last month that the company would be doling out a dividend. Even after that payout, the maker of iPads and iPhones is in the same boat as many other multinational corporations: flush with cash, that is. As corporate borrowing costs drop to almost nothing, they are locking in low rates to generate even more cash. An analysis by the Federal Reserve Bank of Cleveland published last year found that cash holdings as a share of total corporate assets were “the highest since the mid-1950s” at 7.4 percent. (The Cleveland Fed’s conclusions reflect the first quarter of 2011, but the cash-heavy trend continues.)
Building up cash reserves may seem like a no-brainer — who could say no to virtually free money in a time of uncertainty? — but experts have concerns. “A lot of people got out over their skis in terms of how they were investing their cash right before the crisis, and I have some worries again today,” says Barry Smith, global head of State Street Global Advisors’ cash business. More ominously, corporations may be forgetting that the postcrisis world contains some new, unprecedented risks, among them, that cash-rich balance sheets could be very tempting targets for financially constrained governments.
Corporations are cash-rich right now for a variety of reasons. “It mostly comes down to economic uncertainty,” says Smith. Companies are skittish about investing money in operations and don’t see many opportunities to deploy their cash. Also, borrowing costs are low. Even when the economy normalizes, some corporations are likely to hold more cash than they have historically: As they learned in the crisis, outside sources of liquidity, like the commercial paper or repo market, can freeze up overnight and cannot be depended upon.
The challenge for corporate treasurers is to determine what to do with the cash when yields on traditional cash investments, such as money market funds and bank deposits, are at record lows.
Smith notes that some treasurers are again asking for ways to generate extra return, having seemingly forgotten the hard truth revealed by the crisis: Extra return entails extra risk. Instead, he says, corporations should be asking themselves the more fundamental question of how they plan to use the cash. One answer could be what Smith calls a bucketing strategy. A short-term liquid bucket could be earmarked for daily operations, he explains, coupled with a medium-term reserve bucket and a “core cash bucket held for strategic purposes, with no known use in the near term.”
This is not to say that all multinationals are being cavalier with their cash or even holding excessive amounts of it. For instance, Procter & Gamble CEO Robert McDonald oversees a lean cash balance relative to his multinational peers. P&G spokeswoman Jennifer Chelune explains: “Cash balances have varied from $2.5 billion to over $6 billion over the past four years, and our cash levels will fluctuate with variations in debt levels, timing of bond maturities and share repurchases.”
Fat corporate cash balances might seem to be largely a technical topic, of greatest interest to treasurers and investors, but in a postcrisis world it has a political dimension as well. “Policymakers are going to start asking why corporate savings are so high and what can be done to bring them down,” says David Bowers, director at Absolute Strategy Research, a London-based macro strategy consulting firm.
As Bowers points out, there are many rational reasons companies aren’t spending their cash, including a dearth of worthwhile projects offering a decent rate of return. However, the motivation for low interest rates was to get the economy moving again rather than to provide cheap financing for additional cash hoarding by multinationals. The result is that “governments and corporations are at loggerheads,” says Bowers.
Here’s where he sees the story going: “Whoever has the cash is going to end up paying, somehow, someday.” The concept of financial repression, articulated by economist Carmen Reinhart, is already well known, consisting of stealth taxes on large pension funds. Bowers envisions the possibility of “corporate repression” by governments: “Why stop at financials? Why not go after cash-rich nonfinancials as well?” Corporate repression could consist of new taxes on dividends or other strictures.
Multinationals may have very rational reasons to hoard their cash, but if they fully consider the policy angle, they might find equally rational reasons not to. Otherwise, says Bowers, “they may find their cash gets hijacked.”
