Large Companies Hoarding Cash

Aug. 26, 2011
The 1,000 largest public companies in the U.S. had $853 billion of cash reserves at the end of 2010.

The largest U.S. companies are hoarding tremendous amounts of cash at present, in many cases borrowing to do it, according to a new study by REL Consulting.

The 1,000 largest public companies in the U.S. had $853 billion of cash reserves at the end of 2010.

Cash reserves have risen by over 6% since 2009, by 33% since 2008, and by nearly 75% since 2005.

Excluding the financial sector, companies on the Standard & Poor's 500-stock index are holding a cash pile of $1.15 trillion, according to S&P's research unit Capital IQ. The industries hoarding the most were technology ($264 billion), pharmaceuticals ($141 billion) and energy and consumer products (each holding more than $100 billion). Apple, Microsoft, Cisco, Pfizer and Google had the deepest cash cushions.

One reason the companies have this much cash on hand is that revenue for the top 1000 companies improved by 11.5% in 2010, after declining by 12.1% in 2009.

High profits are not the only reason for this buildup as borrowing is also a significant factor. For AAA-rated companies total debt has increased by more than 30% over the past five years. According to the research, companies may be borrowing to get cash on their balance sheets simply because the cost of borrowing is low.

Improvement in working capital management is not a major factor in rising cash levels. Companies' ability to collect from customers, pay suppliers, and manage inventory improved by only 2% in 2010, on the heels of a major deterioration in 2009.

The research found that U.S. companies now have $780 billion in excess working capital, which represents over 30% of their total. Top performers now collect from customers 19 days (44%) faster than typical companies, pay suppliers over 10 days (41% slower, and maintain over 23 days (77%) less inventory on hand.

Looking forward, Ajit Kambil, global research director of Deloitte's CFO Program, says competition for capital will intensify as over $11.5 trillion of financing will be due in the next five years, likely limiting the availability of debt capital.

In an interview with Business Finance, he said that now " is a great moment to sort of arm up and raise some capital. I think it's more incumbent on boards and CEOs and CFOs to have a conversation now than to have it one year or two years from now.

"If you can, raise the capital now, because fortunately for many companies, there's been a lot of capital made available at quite low interest rates because some of the policies of the central banks.

Many of the central bank rates are at close to historic lows. It's not likely that can be sustained over a period of time. If that changes, the cost of capital will go up."

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