Time to Get Off Your Cash?

Companies are content to sit on their cash hoards, but investors are losing patience. What's a CFO to do?

Even before the global financial crisis struck in 2008, corporate coffers were bulging with cash, opening companies to criticism for not putting the money to work. But following the collapse of the credit markets and the on-set of the worst recession since the Great Depression, anxious CFOs put a premium on liquidity and safety, building “fortress” balance sheets that could withstand any financial shock. It was a sensible strategy. After all, as then-president of the National Association of Corporate Treasurers Edward Liebert noted in June 2009, “You can miss your earnings targets and survive, but you can only run out of cash once.”

Today, Corporate America appears in no danger of that. In fact, it has more cash on hand than ever. According to the Federal Reserve, nonfinancial companies held $1.8 trillion in cash and other short-term assets at the end of March — up 26% from a year ago, the largest increase since the Fed began keeping records in 1952. Cash now accounts for 7% of company assets, the highest level in nearly 50 years.

An analysis by CFO magazine shows that nonfinancial firms in the S&P 500 had $939 billion of cash and short-term investments at the end of 2009, also up 26% from 2008. Cash as a percentage of sales was 13%, the highest level in more than 10 years. Meanwhile, the CFO Midcap 1500 (companies with annual sales of $100 million to $1 billion) collectively held $111 billion in cash, up 15% from 2008. At the same time, year-end current liabilities fell 8% for the CFO Midcap 1500 and 9% for the S&P 500.

Now that the recession is fading, why are companies still accumulating greenbacks instead of plowing them back into the business or putting them in shareholders’ pockets? “There’s so much uncertainty about the value of investing, and clear and present dangers from increasing regulation and taxes,” answers David Hirshleifer, professor of finance at the University of California, Irvine. “There’s a high value to having financial slack so that if the firm hits bad times it will still be able to fund internal operations and take positive [net present value] projects,” he adds.

At a time when suspicion of counterparties is prevalent, hoarding cash also makes commercial sense. “It helps us win deals, especially when partnerships can run as long as seven years,” says Mohit Bhatia, CFO of Genpact, a finance and accounting process management firm. “Clients and prospects are very keen to deal with companies with ample liquidity.”

Big cash hoards also help companies avoid having lenders peering over their shoulders and hamstringing them with covenants. Cash and a debt-free balance sheet enable Cree Inc., a maker of light-emitting diodes (LEDs), to grow without restrictions from lenders, says CFO John Kurtzweil. Without the liquidity, he says, “if I wanted to add a factory I would have to renegotiate with bank groups, and they would take a pound of flesh out of me.”

What investors want CFOs to do with excess cash


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