Corporations that hoarded cash coming out of the Great Recession are proving the value of having all that money around when a crisis flares up.
With Greece on the verge of default and global economic uncertainty weighing on investors, some are now taking advantage of the market decline to deploy their cash. The board of Berkshire Hathaway Inc. , the Warren Buffett-led conglomerate, approved a rare share buyback to prop up its slumping stock price, which has reached levels not seen since early 2010.
Berkshire’s decision, however, will do nothing to stem the criticism from some quarters that CEOs are making the economy worse by spending money on share repurchases and acquisitions – when they spend it at all – rather than investing in expansion projects, which would create jobs.
U.S. non-financial companies sat on a whopping $1.2-trillion (U.S.) in cash and short-term liquid investments at the end of 2010, according to Moody’s. That put debt-to-cash ratios at a five-year low of 3.06 in 2010. Some senior managers have argued that the business community did not have the confidence to start spending again, nor could it risk parting ways with stockpiled cash in case corporate lending dried up.
However, critics say the issue isn’t so cut and dried. They argue that stockpiling cash exacerbated the economic slump, which gave even more reason to panic when stock markets finally started to fall. If corporations had invested in job creation, these critics say, that cash would serve as a second stimulus, without government intervention.
Both sides have a point, said Mihir Desai, a finance professor at Harvard Business School.
“For sure, this crisis would have been tremendously worse if the cash balances weren’t what they were” back in 2008, Prof. Desai said, noting that non-financial corporations were able to withstand the weak lending environment because they had ample cash on their balance sheets. For that reason, he gives them credit for hoarding money.
Yet he thinks that era is over, and points out that putting cash to work by building new plants and hiring new workers would serve as an immediate stimulus. He said top executives at some corporations feel the same way, something the public often doesn’t hear. However, he said there is a “co-ordination failure.” Big corporations would like to spend, but aren’t sure if their peers will as well, so no one ends up doling out cash.
To break the cycle, Mr. Desai advocates implementing a tax on cash balances in the United States. “When you are earning zero on your cash, a 2-per-cent tax is a big deal,” he said.
Although the most-cited corporate cash hoarders are global behemoths such as Apple Inc. and Microsoft Corp., Canadian companies are not immune. In the second quarter of 2011, Canadian non-financial companies held $475-billion in Canadian and foreign currency, according to Statistics Canada.
Erin Weir, an economist for United Steelworkers and a writer for the Progressive Economics Forum, said stockpiling cash would be fine if companies were planning to spend it at some point, but data from the past two decades show that the cash isn’t being put to work.
“Unfortunately, corporate Canada has been accumulating ever more cash, regardless of economic conditions,” he said. “If corporations accumulated cash during booms and then invested it during downturns, that would be good for corporate profits and broader economic stability.”
For those who argue that putting cash to work would boost job creation, it is important to note that many North American companies have shipped their manufacturing overseas. That is particularly important for the technology sector, widely viewed as the biggest cash hoarder. Apple’s cash balance was $78-billion (U.S.) last quarter. However, if Apple, and many other firms were to ramp up production, that would boost jobs overseas, particularly in Asia.
Moreover, most corporate cash on American balance sheets is held overseas, where tax burdens are low. That money must be spent overseas to prevent it from being taxed when it is brought back to the U.S.