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MARKET LAB

Dwindling cash hoards reflect earnings slowdown Add to ...

The cash glut in Corporate America has finally started to shrink – but it may not be entirely the good news for the stock market that many prognosticators had hoped.

Data out this week from the Federal Reserve Board showed that U.S. non-financial businesses’ holdings of cash and other liquid assets fell by $20-billion (U.S.) in the second quarter ended June 30. Meanwhile, market analytics firm FactSet reported that cash and marketable securities held by S&P 500 companies fell by $24.3-billion in the second quarter from the first, to $1.19-trillion. It was the first decline since the second quarter of 2010.

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In part, this is evidence that companies are finally putting their cash piles to work, investing in acquisitions and capital spending. But it’s also evidence of trouble on the other side of the equation: a decline in the amount of money coming in.

Cash flows down

FactSet said in a report that S&P 500 capital spending was up 13.7 per cent year over year. It also reported substantial year-over-year growth in dividends and stock buybacks, and a nearly 30-per-cent rise in spending on acquisitions.

But these gains are coming off some pretty low historical levels. FactSet noted that acquisition spending is still 40 per cent below its 10-year average.

Paul Dales, senior U.S. economist at Capital Economics, said that while internal funds and undistributed profits within U.S. corporations remain near historic peaks of almost 10 per cent of gross domestic product, capital spending growth stalled out in the second quarter, remaining at about 7.6 per cent of GDP.

“Businesses could boost their investment by 30 per cent without having to borrow a dime,” he said in a research note this week.

On the other hand, FactSet said, cash flows fell 1.3 per cent year over year, with most sectors feeling the pain. The dip in cash flows exposes the cracks forming from a slowing corporate earnings cycle, which could widen in the coming months.

The fiscal cliff looms

One of the key reasons for the corporate cash hoarding was because management wanted a safety net. Companies thought it wise to cling to their money to provide a cushion in case of a new financial crisis or economic meltdown.

Mr. Dales warned that U.S. companies may feel the hoarding urge return in the fourth quarter and into 2013, as the so-called “fiscal cliff” in U.S. government spending fuels a growing risk to economic stability.

“For many businesses, this may not become a real issue until after November’s presidential election,” he said. “So it is perfectly possible that businesses may start to hoard cash later in the year.”

 

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