Global companies continue to hoard cash at record levels, as worrisome economic conditions hamper investment in operations and investors demand ever-increasing capital returns.
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SAVING FOR A RAINY DAY
In Global Finance’s fourth annual ranking of the Top 25 Cash-Rich Global Public Companies, US companies take 13 spots on the list, including the top three spots. Japanese companies take three of the top spots. Gree Electric is the first Chinese company to make the list, coming in at 25th, and utility Enel of Italy joins the ranks in 24th place. There are 14 companies on this year’s list with more than $20 billion in available short-term liquidity, versus 15 last year. The cutoff to make the ranking this year is around $13.5 billion, whereas last year’s cutoff was around $14 billion.
MAINTAINING LIQUIDITY
Companies continue to prioritize capital security and liquidity over returns, as evidenced by the continued growth of cash piles around the world. As we live with zero-interest-rate policy and negative rates in many global economies, companies are simply dealing with that reality, rather than looking to increase their risk or reduce their liquidity to garner some return. However, there is some evidence that this is changing.
Microsoft overtook GE as the most cash-rich global corporation, with $10.8 billion more in its coffers than last year. While increasing its liquidity, the tech giant from Redmond, Washington, also hiked capital expenditures—to $5.9 billion. But that is a rise of just 8% from the $5.4 billion it spent in 2014. This is a big change in year-on-year capex growth of prior years: 80% in 2013 and the 29% in 2014. Microsoft’s capital structure could change dramatically before we post next year’s list. The company recently announced its largest-ever acquisition—of professional social networking site LinkedIn. The $26.2 billion deal is expected to negatively impact Microsoft’s earnings in 2017 and 2018, and begin to add to profits by 2019.
GE takes second spot, with $70.5 billion in cash on hand. And Cisco once again rounds out the top three, increasing its hoard by $8.3 billion this year, to $60.4 billion.
The first non-US company on the global list is Toyota Motor of Japan, ranking fourth. The company had a strong performance in 2015, raking in net revenue of $227 billion—a 6% rise over the previous year—and it increased net income by 19%—to $18.1 billion, which is attributable, in part, to cost reductions and the weak yen.
Apple, which climbs from 10th spot last year to 5th, making the first time the firm has broken into the top five, despite its being routinely cited for hoarding in any discussion of corporate cash. This is because we look only at truly liquid assets, whereas most data and discussions of corporate cash on balance sheet incorporate long-term marketable securities—those securities that companies expect to hold for a year or longer—in addition to cash and cash equivalents. Apple increased its short-term coffers by $16.5 billion in 2015, bringing its total cash on balance sheet to $41.6 billion. The company also recorded the highest capital expenditures on our list, at just under $12 billion.
One of the big plunges this year is from Pfizer, which falls to 11th place from 5th on a drop of $12.8 billion in cash on balance sheet. Pfizer was in the news this year after its proposed $152 billion merger with Allergan was scuppered—primarily as a result of closing tax loopholes in the US, which would have made a tax inversion (Allergan is headquartered in Dublin, Ireland) challenging, if not impossible. The tax inversion—wherein one company buys another to make the headquarters of the firm residing in a lower-tax jurisdiction its own headquarters—was believed to be a prime reason for the merger. Whether Pfizer will make use of its remaining cash hoard as part of another acquisition remains to be seen. Intel sneaks onto the list this year in 9th place, after just missing the cutoff last year.
HOARDING CASH
The US is the undisputed leader for corporate cash. Data from Moody’s Analytics puts the total cash on balance sheet of the US companies it rates (including long-term marketable securities) at somewhere around $1.7 trillion; that grows to closer to $3 trillion when including cash held overseas. “While the concentration of cash among the top-rated cash holders continues to grow, so too has the portion held by the technology sector, which accounted for a record 46% of total cash in 2015, up from 41% in 2014,” noted Richard Lane, a senior vice president at Moody’s, in a recent report. The top cash-hoarding industries in the US comprise technology, healthcare/pharmaceuticals, consumer products and energy, according to Lane.
Japanese corporates are not far behind, holding 246 trillion yen ($2.2 trillion) in cash and deposits worldwide, according to data from the Bank of Japan released earlier this year.
The corporate cash pile in Europe hovers under €1 trillion ($1.1 trillion). “Energy, automotive, telecommunications and utilities continue to be the most cash-flush industries in Europe,” noted Jean-Michel Carayon, senior vice president at Moody’s, in a report.
CAPITAL RETURNS
Companies in Europe have been returning more to shareholders in recent years, as they shy away from investing in their businesses in the face of poor economic conditions and rising geopolitical risk. Investors in European companies have favored those firms with high cash reserves and strong capital return programs, said Citi strategists in a note earlier this year. “The message to CEOs is obvious—if you want a re-rating, then reinvest less in your business and pay out more to shareholders,” said the Citi equity strategists. They added that it was possible that “much of the ECB’s super-cheap debt will find its way into financing M&A and share buybacks—rather than capex.”
In the US, the story has been somewhat different. Although overall capex fell slightly in 2015, when taking out a 13% decline in investment by energy companies, capex actually rises—by about 2%, according to data from Moody’s. “In 2016 we expect total capital expenditures to decline by 6% to 8%, driven by an estimated 25% to 30% reduction in the energy sector,” said Lane at Moody’s. The agency expects aggregate spending in the S&P 500 on capex, capital return programs and acquisitions this year to stay consistent with 2015 figures, at around $1.9 trillion.
Along with strong capex, excluding energy, outstanding shares in US companies are on track to decline overall in 2016—for the first time since 2011, according to S&P Dow Jones Indices. Companies took advantage of the weak US markets early in the year to buy back stocks aggressively.
S&P 500 companies bought back around $160 billion in shares in the first three months of this year, which is the second-biggest quarter in terms of share buybacks ever. In fact, share buybacks were up about 20% in Q1 2016 over the fourth quarter of 2015, and up 31% over the previous year period, according to S&P Dow Jones Indices. “They [companies] spent more on shares that cost less, and the result was more companies reducing their share count than previously,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, in a report.
Of the Global Cash 25, Apple, GE and Gilead Sciences were the biggest buyers of their own stock. Gilead Sciences spent $8 billion on buybacks, while Apple spent $6.7 billion, and GE, $6.1 billion.
Buybacks and dividend increases were also popular at some Global Cash 25 companies outside the US. Toyota Motor, for example, announced a dividend of ¥125 ($1.20) per share and a ¥40 billion share-buyback program for 2016 when it released its 2015 results. Samsung Electronics of South Korea announced an 11.3 trillion won ($10.3 billion) share buyback program in October 2015. Daimler of Germany raised its dividend to €3.25 on an annualized basis in 2015, up from €2.45 in 2014, but the automaker has no buybacks planned, according to company reports.
