HOW AND WHY CORPORATE CASH HOARDING MUST END – PART II

By Kisandka Moses, Treasury Lead, FinTech Connect 

In the previous white paper Kisandka Moses outlined the current epidemic of corporate cash hoarding and the far ranging global implications it is having. In Part II of this exclusive white paper series she analyses the long term consequences if it continues to happen and asks whether it is down to regulators or companies themselves to bring an end to this practice.

Diversify holdings internally to avoid the ‘trapped cash’ pickle

Whilst there is no hidden or mythical equation which can be used to come to a conclusion on the ethics of surplus cash or balance sheet decorum, all treasurers should adhere to the divestment of corporate currencies in accordance with wider business needs.

U.S. treasurers belonging to the likes of GE, Apple, Verizon and Pfizer will be briefed to keep an eye on industry signs that an opportunity for M&A may be afoot. They will also be called upon to manage the delicate balance between maintaining the liquidity of cash reserves with careful capital preservation. For smaller-mid caps with a much larger debt-equity ratio, treasurers may opt to take advantage of global low-interest rates through paying down on outstanding debt.

As referenced in Part I – for some, the threat of surplus weighs down balance sheets with no-yield investments cluttering portfolios.

“Cash is an evil necessity now, we shouldn’t have too much and the real return is within the business. It is key for multi-national corporations to drive down excess cash reserves whilst preserving liquidity” said one VP of Treasury at an American billion-dollar firm specialising in fire protection and security services.

Clearly then, there is one-size-fits-all strategy for surplus, with each corporation’s debt-equity ratio, revenue stream or spread of geographical operations determining the optimal outcome for cash usage. However we should pay close attention to the share buyback trend as a strategy for avoiding high-capital gains tax at the hands of repatriation, driving down surplus and capitalising on incentives to invest in company shares using cheap finance.

The Economist coined the term ‘repurchase revolution’ to describe the post-2008 gobbling up of treasury shares across corporate America as a vehicle used to return excess cash, or in some cases borrowed cash to shareholders.

The success of Home Depot’s share buybacks provides a fairy-tale example of having, “52 cents [of every dollar] on share repurchases… [allowing Home Deport to use]excess cash flow and cheap debt to repurchase stock [and create] value for investors [resulting in] Home Depot’s shares [having] trebled since 2010”[1].

High-powered supporters of stock buybacks include business magnates Warren Buffett and Carl Icahn, Charles Holley, former CFO at Walmart; the world’s largest company by revenue and perhaps its most customary user Carol Tome, CFO at Home Depot who has overseen the buying back of almost $50BN of company shares since 2002.

In a low-interest rate environment in which corporations regularly encounter cash surpluses, low-yielding investment margins and activist investors; buybacks are necessary to remain accretive to earnings per share whilst reducing the overall cost of capital.

However, not all corporate titans are in favour of the “short-termism” of buybacks as expressed recently by BlackRock’s Chairman and CEO, Larry Fink in his annual letter to shareholders. Fink stated that, “…in the U.S., the quality of corporate earnings is deteriorating, with record share repurchases in 2015 driving valuations — an indication of companies succumbing to the pressures of short-termism in place of constructive, long-term strategies”[2].

Corporates should be mindful of adopting a short-sighted view or reliance on any one particular method of surplus cash diversification as in periods of stunted economic growth or worsening market conditions; excessive buybacks and acquisitions could prove to drain the economic buffers needed to ‘survive the storm’.

Idle cash stunts growth – for everyone

In short, long-term corporate overcapitalization is both a government and business-level nightmare. The trend of cash hoarding has been accused of holding back a full-global economic recovery with knock-on effects for wage growth at the bottom-end of society and capital investment.  In addition, “too-big-to-fail’ corporations are empowered and continue to gain even larger shares of ownership over diversified industries.

In many cases, foreign cash remains idle – unlikely to be repatriated, used for acquisitions or capital expenditure overseas. Far from nimble, proficient cash savers are often the victim of weighed-down balance sheets with an apparent inability to redistribute profits back to the workforce – in the form of wages or to investors – in the form of dividends.

Whilst the U.S. unemployment rate has dropped markedly to 5% since the global recession, wage growth remains anaemic signalling that all the gains the U.S. economy is making are being captured by the already wealthy. Despite capitalism driving corporations to reach ever-higher levels of profit year-on-year, it is no secret that many a U.S. corporation has effectively transformed from an engine of growth to a bloated tax shelter. Rather than concentrate on global expansion, hoarding has caused U.S. firms to become insular and adopt economic short-sightedness – focusing largely on domestic market growth, short-term profits and stock prices.

How much trillions-in-hiding will be enough before corporations begin to take stock of the opportunity to capitalize on the kind of efficiency gains generated only though nimble expansion and R&D?

The answer could lie in the prospect of increased interest-rates, as should they rise, corporate investment must surely rise alongside it and irrespective of the currency, country of origin or industry, corporate cash should not be left to ferment, but rather set to work – hard, to meet the growth targets of the corporation year-on-year. It is also no secret that a wholly diversified investment portfolio has always been central to a firm’s ability to optimize cash and that hasn’t changed – nor does it need to.

1 “The repurchase revolution”, The Economist,http://www.economist.com/news/business/21616968-companies-have-been-gobbling-up-their-own-shares-exceptional-rate-there-are-good-reasons, (September 13^th, 2014)

[1]Fink, L, ‘My Annual Letter to Shareholders’, Linkedin, https://www.linkedin.com/pulse/my-annual-letter-shareholders-larry-fink?trk=hp-feed-article-title-share (April 11^th, 2016)

By Kisandka Moses, Treasury Lead, FinTech Connect 

In the previous white paper Kisandka Moses outlined the current epidemic of corporate cash hoarding and the far ranging global implications it is having. In Part II of this exclusive white paper series she analyses the long term consequences if it continues to happen and asks whether it is down to regulators or companies themselves to bring an end to this practice.

Diversify holdings internally to avoid the ‘trapped cash’ pickle

Whilst there is no hidden or mythical equation which can be used to come to a conclusion on the ethics of surplus cash or balance sheet decorum, all treasurers should adhere to the divestment of corporate currencies in accordance with wider business needs.

U.S. treasurers belonging to the likes of GE, Apple, Verizon and Pfizer will be briefed to keep an eye on industry signs that an opportunity for M&A may be afoot. They will also be called upon to manage the delicate balance between maintaining the liquidity of cash reserves with careful capital preservation. For smaller-mid caps with a much larger debt-equity ratio, treasurers may opt to take advantage of global low-interest rates through paying down on outstanding debt.

As referenced in Part I – for some, the threat of surplus weighs down balance sheets with no-yield investments cluttering portfolios.

“Cash is an evil necessity now, we shouldn’t have too much and the real return is within the business. It is key for multi-national corporations to drive down excess cash reserves whilst preserving liquidity” said one VP of Treasury at an American billion-dollar firm specialising in fire protection and security services.

Clearly then, there is one-size-fits-all strategy for surplus, with each corporation’s debt-equity ratio, revenue stream or spread of geographical operations determining the optimal outcome for cash usage. However we should pay close attention to the share buyback trend as a strategy for avoiding high-capital gains tax at the hands of repatriation, driving down surplus and capitalising on incentives to invest in company shares using cheap finance.

The Economist coined the term ‘repurchase revolution’ to describe the post-2008 gobbling up of treasury shares across corporate America as a vehicle used to return excess cash, or in some cases borrowed cash to shareholders.

The success of Home Depot’s share buybacks provides a fairy-tale example of having, “52 cents [of every dollar] on share repurchases… [allowing Home Deport to use]excess cash flow and cheap debt to repurchase stock [and create] value for investors [resulting in] Home Depot’s shares [having] trebled since 2010”[1].

High-powered supporters of stock buybacks include business magnates Warren Buffett and Carl Icahn, Charles Holley, former CFO at Walmart; the world’s largest company by revenue and perhaps its most customary user Carol Tome, CFO at Home Depot who has overseen the buying back of almost $50BN of company shares since 2002.

In a low-interest rate environment in which corporations regularly encounter cash surpluses, low-yielding investment margins and activist investors; buybacks are necessary to remain accretive to earnings per share whilst reducing the overall cost of capital.

However, not all corporate titans are in favour of the “short-termism” of buybacks as expressed recently by BlackRock’s Chairman and CEO, Larry Fink in his annual letter to shareholders. Fink stated that, “…in the U.S., the quality of corporate earnings is deteriorating, with record share repurchases in 2015 driving valuations — an indication of companies succumbing to the pressures of short-termism in place of constructive, long-term strategies”[2].

Corporates should be mindful of adopting a short-sighted view or reliance on any one particular method of surplus cash diversification as in periods of stunted economic growth or worsening market conditions; excessive buybacks and acquisitions could prove to drain the economic buffers needed to ‘survive the storm’.

Idle cash stunts growth – for everyone

In short, long-term corporate overcapitalization is both a government and business-level nightmare. The trend of cash hoarding has been accused of holding back a full-global economic recovery with knock-on effects for wage growth at the bottom-end of society and capital investment.  In addition, “too-big-to-fail’ corporations are empowered and continue to gain even larger shares of ownership over diversified industries.

In many cases, foreign cash remains idle – unlikely to be repatriated, used for acquisitions or capital expenditure overseas. Far from nimble, proficient cash savers are often the victim of weighed-down balance sheets with an apparent inability to redistribute profits back to the workforce – in the form of wages or to investors – in the form of dividends.

Whilst the U.S. unemployment rate has dropped markedly to 5% since the global recession, wage growth remains anaemic signalling that all the gains the U.S. economy is making are being captured by the already wealthy. Despite capitalism driving corporations to reach ever-higher levels of profit year-on-year, it is no secret that many a U.S. corporation has effectively transformed from an engine of growth to a bloated tax shelter. Rather than concentrate on global expansion, hoarding has caused U.S. firms to become insular and adopt economic short-sightedness – focusing largely on domestic market growth, short-term profits and stock prices.

How much trillions-in-hiding will be enough before corporations begin to take stock of the opportunity to capitalize on the kind of efficiency gains generated only though nimble expansion and R&D?

The answer could lie in the prospect of increased interest-rates, as should they rise, corporate investment must surely rise alongside it and irrespective of the currency, country of origin or industry, corporate cash should not be left to ferment, but rather set to work – hard, to meet the growth targets of the corporation year-on-year. It is also no secret that a wholly diversified investment portfolio has always been central to a firm’s ability to optimize cash and that hasn’t changed – nor does it need to.

1 “The repurchase revolution”, The Economist,http://www.economist.com/news/business/21616968-companies-have-been-gobbling-up-their-own-shares-exceptional-rate-there-are-good-reasons, (September 13^th, 2014)

[1]Fink, L, ‘My Annual Letter to Shareholders’, Linkedin, https://www.linkedin.com/pulse/my-annual-letter-shareholders-larry-fink?trk=hp-feed-article-title-share (April 11^th, 2016)