After several years of profit growth companies are bulging with cash
Corporations are left rich even after huge stock buybacks
NEW YORK » Imagine the dilemma of having so much cash in your bank account that you didn't know what to do with it.
This is of course a pipe dream for the average American, but is now reality for the country's biggest corporations. The industrial companies that make up the Standard & Poor's 500 index -- which excludes financial, transportation and utility companies -- have a staggering $643 billion in cash and equivalents.
Wall Street analysts remain unsure how companies will spend this record hoard. Even an unprecedented $500 billion of stock buybacks over the past six quarters have failed to stop companies from building lofty amounts of cash on hand.
"We're in a time that is out of whack with all historical numbers," said Howard Silverblatt, equity market analyst at Standard & Poor's. "People are demanding why corporations need so much cash, what are they going to do with it? In spite of stock buybacks, dividends and acquisitions, this cash is still going to take a while to spend."
Companies began propping up their reserves through 16 straight quarters of double-digit profit growth. The money tucked away in corporate coffers has now gotten to the point where it's having a major impact on quarterly earnings, with S&P reporting that income earned on the interest rose 37.9 percent in 2005 and is expected to increase another 64 percent this year.
Coincidentally, the same Federal Reserve that spooked the markets with 16 straight interest rate hikes has actually been doing these big companies a favor. The increase in rates helped companies grow through higher interest payments.
The best example of how these stockpiles are helping companies boost profits might be Comverse Technology, whose $2.33 billion of cash represents 53 percent of its market valuation. In 2005, the voice messaging software company reported a profit of $57.3 million -- and the amount of interest income was $38.9 million, according to S&P.
But leading the pack with the most cash is Exxon Mobil Corp., which has about $36.55 billion on its balance sheet. That amount is nearly equal to its 2005 profit of $36.13 billion, which went down in history as the highest ever for a U.S. company.
This is expected to be among the topics brought up Wednesday when the oil company holds its annual shareholders meeting in Dallas. Executives are expected to detail how they plan to use their significant holdings, including investments and returns to shareholders.
Exxon Mobil spent $17.7 billion in capital expenditures, $7.2 billion in dividends to shareholders, and $18.2 billion in stock buybacks in 2005, according to spokesman Mark Boudreaux. The company also projects it will average about $20 billion in capital expenditures through 2010, and has some 60 projects lined up during that time.
Beyond buybacks, very few companies have done much with their stockpiles. The most talked about was Microsoft Corp.'s decision to pay out a record $32 billion special dividend to shareholders in 2004 -- though relatively few companies have followed suit.
Others have taken a unique approach, like Apple Computer Co.'s decision to set up a Nevada-based asset management firm to handle its cash and short-term investments. Apple currently has about $6.34 billion to play with, still below the $9.06 billion held by PC maker Dell Inc., according to S&P.
One of the biggest avenues in which companies have spent this excess money has been through mergers and acquisitions.
Some 75.4 percent of all deals under $1 billion so far this year were done purely with cash, according to Baird analyst Steven Bernard. There has been $122 billion worth of deals done under $1 billion, up from $101 billion during the same period last year.
"Cash adds additional fuel to M&A potential," said Bernard, who is director of Baird's merger and acquisition market analysis. "This is particularly true for those industrial companies that have cut the fat to drive growth. The only option you have after that is to drive top line growth with things like acquisitions."
Many of these deals included spot acquisitions for major companies with money to burn. Barring all of that, Silverblatt said most companies will continue doing what they have been -- saving.
"Just like a person has cash in the bank and puts it into a money market, they are now putting it in six-month CDs," he said. "They're looking for ways to save it for a longer period of time."