What to do with corporate cash? |
7 February 2012
Large companies have built up record cash reserves in the last three years, reflecting their success in controlling costs and rebuilding profits. However, the pace of economic recovery depends on what companies do with these substantial cash piles, according to Ian Stewart, Deloitte chief economist.
The cash holdings of UK non-financial companies stood at £731.4 billion in the third quarter of 2011, the highest level on record. US corporates collectively hold $1.73 trillion in cash. As a share of total assets held by US non-financial companies, cash holdings are at the highest level in more than half a century.
Ian Stewart, Deloitte chief economist, comments: “While major corporates are profitable and cash-rich, governments and consumers in Western economies are, by and large, short of cash. If Western economies are to grow over the coming years businesses will need to do a lot of the spending.”
The Office of Budget Responsibility forecasts that in the next five years business investment will rise by 10% a year, double the rate in the decade prior to the financial crisis. So far, though, there is little evidence of such a boom in corporate spending rates. In the UK, business investment, M&A and hiring remain largely subdued. Corporates have proved more willing to pay out cash to shareholders, through dividends and by buying back their shares.
While dividend payout levels are not high by long term yardsticks, they have risen over the last year. For example, in the UK, dividend payments rose by almost 20% in 2011. Buy backs can be seen as a signal of confidence in a company's future. They are also attractive because, unlike dividends, they are one-offs, and imply no continued commitment to pay out. US corporates spent $336 billion buying back their own shares last year.
Another option for corporate cash piles is to hold on to them. A Deloitte poll of 136 large businesses found that the most appropriate use for corporate cash in 2012 – cited by over a third – was ‘holding on to it’.
Four years after the onset of the global financial crisis the world remains an uncertain place. From uncertainty about the future of the euro to worries about an Iranian blockade of oil supplies coming through the Straits of Hormuz, corporates face a dizzying array of risks. High levels of corporate cash are seen as an insurance policy against such events.
For governments focussed on getting growth back, this is not the right answer. Institutional investors may also start to ask why, if corporates can't find a good return on their cash, they don't return more of it to shareholders.
Ian Stewart concludes: “The key to unlocking these cash piles is to give corporates a greater sense of confidence about the future. This is heavily dependent on governments running the right economic policies. High levels of corporate cash may, in part, reflect corporate scepticism that governments will be able to re-boot growth.”
-Ends-
Notes to editors:
To subscribe to Ian Stewart’s weekly economic briefing note, please visit www.deloitte.co.uk/mondaybriefing.
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