Capital Pains: Big Cash Hoards

Companies' Growing Coffers Draw Investor Calls for Action
Deals, Buybacks Make Little Dent

July 21, 2006; Page C1

Many Americans need to look for ways to curb their spending. Big U.S. companies have the opposite problem.

The piles of cash and stockpile of repurchased shares at these companies have hit record levels and continue to grow along with corporate earnings, creating challenges for the executives who must decide how to allocate all that capital.

While some investors carp about managers hoarding cash rather than building their businesses, data show companies have in fact been reinvesting in themselves. Some are also acquiring other companies, although these deals are often smaller in scope than the takeovers executed in the go-go late 1990s, as executives don't want to undertake expensive deals that could hamper investor returns for years to come.

The cash figures are also becoming so large that they are skewing some of the yardsticks used to gauge corporate performance. For example, with more companies seeing bigger portions of their bottom line accounted for by interest income, it becomes harder for Main Street investors to gauge how well some corporate managers are running core operations.

"They've been generating an unprecedented amount of cash, and they're having a hard time figuring out what to do with it in a lot of cases," says Mark Zandi, chief economist at the Web site Moody's, a unit of Moody's Corp.

At the 174 companies in the Standard & Poor's Industrials index with complete treasury-share disclosure, cash and the companies' holdings in their own stock topped $790 billion in the first quarter, or nearly 20% of their total stock-market value, according to research S&P will release today.

That particular S&P index excludes sectors that always carry a lot of cash, such as financial firms and utilities. The figure includes shares repurchased by the companies and held in their treasury accounts that can be used as currency to buy another company or to fund employee-compensation plans, among other uses.

Those 174 S&P Industrials had more than $295 billion in cash in the first quarter. That amount equals more than 7% of the companies' combined stock-market value, the highest level in nearly two decades.

For some of the biggest and best-known names -- including Exxon Mobil Corp., Coca-Cola Co. and Merck & Co. -- cash and the first-quarter market value of the companies' investments in their own shares added up to more than one-quarter of their total market value in the period, according to the S&P, a unit of McGraw-Hill Cos.

Despite ample cash piles, many companies are being careful in how they invest. Thanks to high profits driven mainly by soaring oil prices, Exxon had more than $36 billion in cash at the end of the first quarter. While meeting with analysts earlier this year, Chairman and Chief Executive Rex Tillerson said the company plans to minimize its cash position by investing some $20 billion a year from 2006 through 2010. He also said the company was willing to be methodical, repurchasing shares and paying dividends, rather than rush into lower-return projects.

Judging from the second-quarter earnings reports now rolling in, cash and treasury-share amounts are still growing, according to S&P. Just last night, Microsoft Corp. said it had more than $34 billion in cash and short-term investments on June 30. The company also announced plans to buy up to $20 billion of its own shares and plans to invest up to another $20 billion on repurchases over the next five years.

The cash and ample repurchases are the result of a multiyear profit bonanza: As a group, S&P 500-stock index companies hit 16 consecutive quarters of double-digit earnings growth through the first quarter, and a lot of that money fell to the bottom line as companies continued to cut costs and otherwise improve their profitability.

Companies have also been paying off some of their bonds and refinancing their remaining debts.

Share repurchases, or "buybacks," are in uncharted territory, too. What companies choose to do with all that repurchased stock -- retire it or put it toward acquiring other companies -- could have an important follow-on effect.

"Because the amounts are mammoth, how and when they use this money could have a big impact on companies, markets and the economy," says Howard Silverblatt, senior index analyst at S&P.

Broadly, companies have three options for what to do with their cash piles. They can keep the money in the bank. Or they can return it to shareholders via more share repurchases or dividend payments, which also are on the rise: Since 2003, more than 390 of the companies in the S&P 500 have raised or started paying a dividend, while only 25 have cut their dividends. Finally, they can seek growth by investing in their own business or buying another company.

S&P's Mr. Silverblatt believes that steep cash balances and pressure to seek growth opportunities could bolster the already-rising wave of mergers and acquisitions.

But is that good news for investors? Corporate takeovers have a spotty track record of creating value for shareholders of acquiring firms.

Even as their bank accounts continue to bulge, companies are looking for ways to put some of their money to work now. Business investment fell quarter after quarter in the first couple years of this decade, as companies battened down the hatches amid corporate scandals and a sliding stock market. But such spending has grown at a double-digit clip in seven of the past eight quarters through the 2006 first quarter, according to government economic data.

In February 2005, then-Federal Reserve Chairman Alan Greenspan told Congress that companies' capital spending was lagging behind the pace of growth in their profits. But that might be changing. Early this week, Fed governor Kevin M. Warsh cited data indicating that cash is beginning to decline, and that corporate borrowing is starting to tick up.

Also, companies are spreading their money around rather than making big-ticket, headline-grabbing purchases, perhaps making it harder for the casual observer to see how much spending is actually taking place.

Earlier this week, for example, International Business Machines Corp. reported cash and marketable securities, not including treasury shares, of about $10 billion as of June 30 -- down 27% from the end of 2005. IBM has paid cash to buy 39 companies in the past three years, many of them relatively small software companies, says spokesman John Bukovinsky. The company plans to put $6 billion into Indian operations in the next three years. IBM has also significantly cut its share count through repurchases, and consistently raised its dividend in recent years.

With portions of the economy showing signs of slowing, and a host of geopolitical and other concerns, how companies spend their cash -- or don't -- is becoming even more important, observers say.

"Capital allocation is always important, and it's even more critical now," says Michael Mauboussin, chief investment strategist at Legg Mason Capital Management in Baltimore.

Write to Ian McDonald at