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HOW AND WHY CORPORATE CASH HOARDING MUST END – PART II

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HOW AND WHY CORPORATE CASH HOARDING MUST END – PART II

By Kisandka Moses, Treasury Lead, FinTech Connect 

logoIn 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 13th, 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 11th, 2016)

Business

Euro zone business activity shrank in January as lockdowns hit services

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Euro zone business activity shrank in January as lockdowns hit services 1

By Jonathan Cable

LONDON (Reuters) – Economic activity in the euro zone shrank markedly in January as lockdown restrictions to contain the coronavirus pandemic hit the bloc’s dominant service industry hard, a survey showed.

With hospitality and entertainment venues forced to remain closed across much of the continent the survey highlighted a sharp contraction in the services industry but also showed manufacturing remained strong as factories largely remained open.

IHS Markit’s flash composite PMI, seen as a good guide to economic health, fell further below the 50 mark separating growth from contraction to 47.5 in January from December’s 49.1. A Reuters poll had predicted a fall to 47.6.

“A double-dip recession for the euro zone economy is looking increasingly inevitable as tighter COVID-19 restrictions took a further toll on businesses in January,” said Chris Williamson, chief business economist at IHS Markit.

“Some encouragement comes from the downturn being less severe than in the spring of last year, reflecting the ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year.”

The bloc’s economy was expected to grow 0.6% this quarter, a Reuters poll showed earlier this week, and will return to its pre-COVID-19 level within two years on hopes the rollout of vaccines will allow a return to some form of normality. [ECILT/EU]

A PMI covering the bloc’s dominant service industry dropped to 45.0 from 46.4, exceeding expectations in a Reuters poll that had predicted a steeper fall to 44.5 and still a long way from historic lows at the start of the pandemic.

With activity still in decline and restrictions likely to be in place for some time yet, services firms were forced to chop their charges. The output price index fell to 46.9 from 48.4, its lowest reading since June.

That will be disappointing for policymakers at the European Central Bank – who on Thursday left policy unchanged – as uncomfortably low inflation has been a thorn in the ECB’s side for years.

Factory activity remained strong and the manufacturing PMI held well above breakeven at 54.7, albeit weaker than December’s 55.2. The Reuters poll had predicted a drop to 54.5.

An index measuring output which feeds into the composite PMI fell to 54.5 from 56.3.

But despite strong demand factories again cut headcount, as they have every month since May 2019. The employment index fell to 48.9 from 49.2.

As immunisation programmes are being ramped up after a slow start in Europe optimism about the coming year remained strong. The composite future output index dipped to 63.6 from December’s near three-year high of 64.5.

“The roll out of vaccines has meanwhile helped sustain a strong degree of confidence about prospects for the year ahead, though the recent rise in virus case numbers has caused some pull-back in optimism,” Williamson said.

(Reporting by Jonathan Cable; Editing by Toby Chopra)

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Volkswagen’s profit halves, but deliveries recovering

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Volkswagen's profit halves, but deliveries recovering 2

BERLIN (Reuters) – Volkswagen reported a nearly 50% drop in its 2020 adjusted operating profit on Friday but said car deliveries had recovered strongly in the fourth quarter, lifting its shares.

The world’s largest carmaker said full-year operating profit, excluding costs related to its diesel emissions scandal, came in at 10 billion euros ($12.2 billion), compared with 19.3 billion in 2019.

Net cash flow at its automotive division was around 6 billion euros and car deliveries picked up towards the end of the year, the German group said in a statement.

“The deliveries to customers of the Volkswagen Group continued to recover strongly in the fourth quarter and even exceeded the deliveries of the third quarter 2020,” it said.

Volkswagen’s shares, which had been down as much as 2%, turned positive and were up 1.5% at 164.32 euros by 1158 GMT.

Sales at the automaker rose 1.7% in December, at a time when new car registrations in Europe dropped nearly 4%, data from the European Automobile Manufacturers’ Association showed.

Like its rivals, Volkswagen is facing several challenges due to the coronavirus pandemic as well as a global shortage of chips needed for production.

It also sees tough competition in developing electrified and self-driving cars. The merger of Fiat Chrysler and Peugeot-owner PSA to create the world’s fourth-biggest automaker Stellantis adds to the pressure.

Volkswagen said on Thursday it missed EU targets on carbon dioxide (CO2) emissions from its passenger car fleet last year and faces a fine of more than 100 million euros.

The group is expected to release detailed 2020 figures on March 16.

($1 = 0.8215 euros)

(Reporting by Kirsti Knolle; Editing by Maria Sheahan and Mark Potter)

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Global chip shortage hits China’s bitcoin mining sector

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Global chip shortage hits China's bitcoin mining sector 3

By Samuel Shen and Alun John

SHANGHAI/HONG KONG (Reuters) – A global chip shortage is choking the production of machines used to “mine” bitcoin, a sector dominated by China, sending prices of the computer equipment soaring as a surge in the cryptocurrency drives demand.

The scramble is pricing out smaller miners and accelerating an industry consolidation that could see deep-pocketed players, many outside China, profit from the bitcoin bull run.

Bitcoin mining is closely watched by traders and users of the world’s largest cryptocurrency, as the amount of bitcoin they make and sell into the market affects its supply and price.

Trading around $32,000 on Friday, bitcoin is down 20% from the record highs it struck two weeks ago but still up some 700% from its March low of $3,850.

“There are not enough chips to support the production of mining rigs,” said Alex Ao, vice president of Innosilicon, a chip designer and major provider of mining equipment.

Bitcoin miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify bitcoin transactions in a process which produces newly minted bitcoins.

Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co, the main producers of specially designed chips used in mining rigs, would also prioritise supplies to sectors such as consumer electronics, whose chip demand is seen as more stable, Ao said.

The global chip shortage is disrupting production across a global array of products, including automobiles, laptops and mobile phones. [L1N2JP2MY]

Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.

Demand for rigs has boomed as bitcoin prices soared, said Gordon Chen, co-founder of cryptocurrency asset manager and miner GMR.

“When gold prices jump, you need more shovels. When milk prices rise, you want more cows.”

CONSOLIDATION

Lei Tong, managing director of financial services at Babel Finance, which lends to miners, said that “almost all major miners are scouring the market for rigs, and they are willing to pay high prices for second-hand machines.”

“Purchase volumes from North America have been huge, squeezing supply in China,” he said, adding that many miners are placing orders for products that can only be delivered in August and September.

Most of the products of Bitmain, one of the biggest rig makers in China, are sold out, according the company’s website.

A sales manager at Jiangsu Haifanxin Technology, a rig merchant, said prices on the second-hand market have jumped 50% to 60% over the past year, while prices of new equipment more than doubled. High-end, second-hand mining machines were quoted around $5,000.

“It’s natural if you look at how much bitcoin has risen,” said the manager, who identified himself on by his surname Li.

The cryptocurrency surge is affecting who is able to mine.

The increasing cost of investment is eliminating smaller players, said Raymond Yuan, founder of Atlas Mining, which owns one of China’s biggest mining business.

“Institutional investors benefit from both large scale and proficiency in management whereas retail investors who couldn’t keep up will be weeded out,” said Yuan, whose company has invested over $500 million in cryptocurrency mining and plans to keep investing heavily.

Many of the larger players growing their mining operations are based outside of China, often in North America and the Middle East, said Wayne Zhao, chief operating officer of crypto research company TokenInsight.

“China used to have low electricity costs as one core advantage, but as the bitcoin price rises now, that has gone,” he said.

Zhao said that while previously bitcoin mining in China used to account for as much as 80% of the world’s total, it now accounted for around 50%.

(Reporting by Samuel Shen and Alun John; Editing by Vidya Ranganathan and William Mallard)

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