Bloomberg TV Interview, March 25, 2013
Sandy Cockrell, national managing partner, U.S. CFO Program, Deloitte LLP, discusses the highlights from the Q1 2013 North American CFO Signals survey results.
Moderator: Why is it that America’s big corporations are hoarding cash? Is it fear, is it saving for the next new new, what to see what they will acquire. Sanford Cockrell is global leader of Deloitte’s CFO program. He suggests CFOs and their Board of Directors are running scared. Great to have you here this morning. What did you learn, Sandy, in your CFO analysis.
Sandy: Well, a couple of things to get back and pick up on your conversation or on cash conservation. I think there are some things behind this that are pretty important. Number one, boards are not pressuring management to do a lot with the cash.
Moderator: Why not?
Sandy: They just don’t feel like it is the time to do it. They are worried about risk. Risk is something that boards are extremely focused on right now. It is probably their second concern in terms of talking with management. In terms of revenue growth, companies really are focused on growing revenues in existing markets, not emerging markets, and pretty much an organic growth philosophy. So, it is not to really use cash in any kind of way that would be risky at this point. Something else is kind of important. When you look at a couple of trillion dollars of cash that sits on corporate balance sheets around the world. A lot of that is offshore for large U.S. multinationals. Bringing that back to the United States can be pretty draconian in terms of the overall tax rate.
Moderator: Is there a way around that? You run the money through Cyprus?
Sandy: No, I don’t think you will be seeing that. But at the same time, until we get some clarity around the U.S. tax policies, especially our international tax regime, you are going to see a lot of that cash continue to sit offshore.
Moderator: Well, we do see some cash being put to work in the form of dividends. Why are they so popular these days with CFOs?
Sandy: Well, I think dividends is something, a lot of board discussion around that, but what CFOs would say is their boards were not pressuring them to really adopt too aggressive dividend policies. We saw a lot of that around the first of the year. Some of that had to do with tax reform catching the tax rate. But, in terms of what we are seeing, we are projecting that companies will increase their dividends only about 3.6% over this next year.
Moderator: I am fascinated by this. I think CFO analysis is way underrated. Everybody is CEO, CEO, CEO. I think the CFO is really, really important. Doesn’t a CFO walk in the office and say, “Hey Larry we have got to raise the dividend 14%.”
Sandy: Well, CFOs do not necessarily want to do that. They are living in this world of complexity and risk as well, and the idea of being able to keep your cash when you are not being pressured to do it is really pretty important.
Moderator: Let me bring in Lawrence Haverty here, an associate portfolio manager of the Gabelli Multimedia Trust (GAMCO). Do you have a question for Mr. Cockrell?
Larry Haverty: No. I think the CFO issues are really good, but is there any learning among the CFOs? I mean you have a number of these companies that have been hitting new highs. Two companies I know with very very strong CFOs, Home Depot in Carol Tome and Macy’s in Karen Hoguet. Obviously, the CFOs have conferences. Don’t they have role models of how to do the job, who to really be the consigliore of the Chairman?
Sandy: Of the CEO and the Chairman. Yes. You know CFOs are pretty lonely people. They don’t have many peers in their organizations, but they do tend to get together and talk about best practices, but if you go back to some of the metrics that we found on the survey, which make it kind of interesting, companies are only forecasting topline growth about 5.5%, well below the three-year average in our survey. Now, at the same time, they are posting fairly healthy bottom line growth at about 12.1%. The real question is how long can they continue to do that, and they have done that by taking cost out of the system by becoming more efficient. At some point, you hit the wall on that.
Moderator: Washington, we see the CEOs go meet with the President, take their pictures, tell him how worried they are about fiscal policy and why they can’t make decisions. Then the CFOs have to actually go and make the decision. What is the feeling toward Washington?
Sandy: Well, Washington creates tremendous uncertainty for CFOs, especially from a regulatory standpoint. When you look at financial services, you look at health care, those are areas where the CFOs or the financial community is begging for some clarity, in order to put that money to work, to make investment decisions, and I think that is when you will see things like M&A and that kind of thing.
Moderator: I love what Larry said here. This is just absolutely critical, this idea of a lonely CFO. That is my experience.
Sandy: And I think that is why they do enjoy getting together, comparing best practices and talking about things like that, and the role of the CFO over the last 10 years has really expanded in more of a corporate strategist.
Moderator: We are going to come back with Sandy Cockrell, lots to talk about here on CFOs.
Moderator: Sandy Cockrell is with us. He is with Deloitte and of course their consultancy to corporations, he is looking at Chief financial officers. Also with us is Lawrence Haverty of GAMCO. Larry I loved what you said about the lonely CFO out there. When you go into a corporate meeting, how do you treat a CFO different from the CEO?
Larry Haverty: I think I am trying to get into the CFO’s head, and the thing I am most interested in is the pretax return on capital. You take Apple as an example. It has a pretax return now of 5 times; that is a 20% return. So basically, you can buy the stock at 20% return. I want to know how responsive the CFOs is to the idea of the return on buying stock. A company where you have had wonderful response to this, and again I think it is John Malone directing the show from the back, has been DirecTV. They installed Mike White who was an operator from Pepsico as the Chief Executive from outside, kept the entire financial staff. Two of them had been working together. They have been buying stock.
Moderator: Okay, so that is the best practice. Sandy Cockrell, what is the worst practice of CFOs?
Sandy: In that situation, the worst practice would be not having a strategic team in place and basically making decisions quarter to quarter around dividend policy, around buybacks and those kind of things. What boards really want to see from their CFOs is a plan. Let's see something strategic that takes into account the entirety of their capital structure and their forecasted needs.
Moderator: And what America wants to see from CFOs is hiring. What sort of anecdotes do you have on willingness or reluctance to add jobs.
Sandy: Very interesting. You all came out with a report this morning on aggregate payroll data, which was actually pretty positive. In our survey, it is not quite as positive, but we ask a slightly different question. We ask, “What will be your expected hiring growth over the next 12 months?”
Moderator: So, what do you you see?
Sandy: And in the U.S., it is forecasted to be less than 1%. It is just not there. What is driving that is a concern around conservatism and a lack of clarity.