Why Are U.S. Corporations Still Hoarding $1.5 Trillion in Cash?

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Stack of One Hundred Dollar Bills in Bank Vault
Alamy
For years -- ever since the Great Recession ended -- pundits have been pontificating about a strange trend in corporate America. Despite earning record profits, and having the ability to borrow cash easily, companies were refusing to spend. Like Scrooge in his office, they were raking in profits ... and then sitting on them, refusing to put the money to work to grow the American economy.

Or so the story went. But was it true? Is it true?

It turns out that this real story is a bit more complicated; and you'll be surprised where a lot of that cash came from ... and what it needs to be spent on.

A Kernel of Truth

Every complex tale grows from a kernel of truth, of course, and this one actually grows out of two such kernels.

It's true that American corporations are fabulously profitable today. According to the Department of Commerce, profit margins at U.S. companies in 2013 were regularly hitting levels of 9.3 percentage points -- more than 57 percent higher than average over the past 60 years.

Also true is that these profits, in turn, yielded a lot of cash for the corporations earning them. From 2006 through mid-2013, total cash reserves at U.S. nonfinancial companies (i.e., everything but banks) nearly doubled, rising from $820 billion to $1.48 trillion, an 81 percent increase. Credit ratings company Moody's (MCO) recently estimated that cash levels at the end of 2013 probably hit $1.5 trillion.

Source: Moody's Investors Service
Particularly flush is America's tech sector. Four of the top five holders of cash are tech companies Apple (AAPL), Microsoft (MSFT), Google (GOOG) and Cisco (CSCO), who together possess $345 billion in cash reserves, or about 23 percent of all cash owned by corporate America today. Overall, the tech sector controls more than half of such cash: $515 billion.

Now that we've got these facts on full display, let's move on to the three myths they've given rise to.

Myth No. 1: Companies aren't spending.

With so much cash sitting around on their books, it's logical to conclude that American companies must not be spending -- not hiring, not buying equipment (which spurs other companies to hire), not increasing dividends (which puts cash in consumers' hands, so they can spend). As such, corporations are getting a bad rap for "holding back the American economy."

In fact, though, looking at Moody's data we see that while corporations did tighten their grip on their cash during the downturn, now, they're spending again.

From 2006 through mid-2013, capital spending at American nonfinancial corporations has grown 45 percent to $868 billion annually at last report. Annual dividend payouts by such companies have grown in tandem, up 43.5 percent to $366 billion annually.

Source: Moody's Investors Service
Myth No. 2: Companies are saving more than they need to.

It is true that cash levels have grown much faster than spending -- 81 percent over the past seven years, versus 40-odd percent for spending. Yet viewed from another perspective, companies really aren't putting all that much more of their cash in the bank than they have in years past.

As Moody's senior vice president Richard Lane pointed out in an interview with us, if you examine American nonfinancial corporations as a whole, and how they used their cash in 2006, what you'll find is that they generated about $8 trillion in revenues from their businesses back then, and kept about $820 billion in cash -- 10 percent of annual revenues -- in reserve.

Compare that to today's habits, and what you'll see is that this same group of companies is generating about $11 trillion in annual revenue, and keeping about $1.5 trillion in cash on the side.

So they're sitting on a cash cushion equal to roughly 13 percent of annual revenue. It's an increase in savings, to be sure. But it's not as big of an increase as you might have heard.

Myth No. 3: All this cash is just sitting around for no reason.

All of this saving has added up to $1.5 trillion in cash reserves. That's a fact. But is it true that this is cash companies are free to spend, and invest in the economy, to get America growing again -- but they're just unwilling to spend it?

Not entirely. For one thing, as Lane explains, "about 60 percent of [non-financial corporate] cash piles are offshore and subject to as much as 35 percent tax if brought back to the U.S."
That's a serious disincentive to companies' trying to putting this money to work. It also means that there's about one-third less cash "out there" than we think -- because upon repatriation of these profits, one-third would immediately be claimed by the government (which would, of course, then put it to work in its own way.)

Perhaps the most surprising revelation about the $1.5 trillion in "cash on the sidelines," though, is that corporations aren't entirely free to spend it as they wish. This is because not all of this cash was amassed from profits that the corporations earned. A lot of it is money that they borrowed.

As shown in the first chart up above, companies grew their cash reserves by $33 billion over the six months from the end of 2012 to mid-2013. Meanwhile, the past 12 months have seen a $201 billion increase in corporate debt.

"Apples-to-apples," says Lane, "that means that over the past year at least, companies have increased their debt by a factor of six relative to cash growth." Lane went on to say that "the increased debt reflects a very accommodative bond and loan market in 2013, with low overall costs and attractive terms for borrowers."

Result: Today, nonfinancial companies have stacked up a staggering $4.8 trillion worth of debt owed to their lenders and bondholders.

The Upshot

A lot of this debt must be repaid in relatively short order. According to Moody's data, some $1.53 trillion in nonfinancial corporate debt matures over the next five years, which is actually a bit more than the $1.48 trillion in cash they've got on hand.

And so this is the real revelation: That "$1.5 trillion" that U.S. corporations supposedly have stashed in the bank, and are just too stubborn to spend? It's really not theirs for the spending at all. Every penny of it -- and more -- is already spoken for by the banks and other creditors who lent them the money.

Investors waiting for the happy day when all this money comes "off the sidelines" and floods into the market, lifting the economy, may be kept waiting far longer than they expect. What we should really be worrying about is the risk that corporations will have to take even more money out of the economy, to pay their debts.

Motley Fool contributor Rich Smith owns shares of Apple. The Motley Fool recommends Apple, Cisco Systems, Google and Moody's. The Motley Fool owns shares of Apple, Google and Microsoft.

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51 Comments

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Michel Phillips

Dots not connected. Article emphasizes corporations borrowing. Why are they borrowing? Capacity utilization is below its historic norm, so they don't need to build more capacity: http://www.federalreserve.gov/releases/g17/current/

Profits are skyrocketing, so it's not like they don't have cash flow: http://research.stlouisfed.org/fred2/series/CP

The apparent answer, from the article: "Annual dividend payouts by such companies have grown in tandem, up 43.5 percent to $366 billion annually." In other words, corporations are borrowing at the current rock-bottom interest rates in order to put $$$$ directly into the pockets of their investors.

Great. Just great.

February 03 2014 at 7:12 PM Report abuse rate up rate down Reply
jrgumshoe

They plan to use that money to outsource every single one their jobs overseas. Say goodbye to America as we once knew it. We are quickly becoming a nation of the haves and have not's. The middle class is just about gone.

January 17 2014 at 5:46 AM Report abuse rate up rate down Reply
toosmart4u

In 2012, the last year that I saw the taxes of Exxon-Mobile, They paid NO taxes at all and received a 187 million refund from the IRS. They claim they did pay taxes but they count the employees with holdings NOT any money out of their pockets.

January 17 2014 at 12:20 AM Report abuse rate up rate down Reply
hellhound551kb

the reason these companies have so much cash is because they sent all the jobs to China and India and fired everyone here. Then they make the remaining small group of employees still here do 2 or 3 jobs for the same pay. They give very little in increases always whining that they didn't meet projections so there isn't much to give. Then they go ahead and give the CEO's a 20 million bonus. This has been going on for more than 30 years gradually taking more of the money on top and not raising salaries. This is one of the big problems with the economy right now...the average guy has alot less to spend on anything except essentials. When you take away the average guy's ability to spend , you effectively kill the economy. This is a consumer driven economy....guess what? they have steadily kept the salaries down while the cost of living keeps rising. Do the math....less spending ...hurts all business especially small business. They are getting richer because they pay next to nothing for labor in these countries and we are all suffering here because of the greed at the top. If our government was worth anything they would put a heavy tax on goods coming from outsourced jobs and countries. that would make them rethink the outsourcing. But of course our government is aligned with their corporate sponsors so that will never happen. We are screwed.

January 16 2014 at 11:37 PM Report abuse +2 rate up rate down Reply
Mike

This cash has been stolen for the working class, the middle class and the small business community. In the last 30 years, corporations have created huge loopholes on the american tax code system in order to avoid paying any taxes. Thus, they use our infrastructure (primarily maintained by taxation of the working class, the middle class and the small business community) and contribute NOTHING back. These loopholes have been implemented with the support of our politicians and legislators who are owned and controlled by corporate interests (through immense campaign contributions and lobbying). For example, how many of you readers knew that most of the large corporations mentioned in this article pay 0% taxes? (you read well) 0% taxes!!! Therefore, the stashed cash mentioned in this article is owed to us, the 99%. It has been calculated by prominent economists that if corporations would pay their fair share of taxes, we would not be having any problem with our health care system and with other critical social programs that are being curtailed to reduce the growth of our national debt. Some of this is eloquently documented in the documentary "We are not broke" available on Netflix and other similar venues. Corporations are one of the pillars of the capitalist system. However, they have lately been running amok in an envelop of corruption; thus, they will end up destroying the very hand that feeds them. THERE IS NO CAPITALISM WITHOUT CONSUMERS. Corporations need regulations orchestrated by honest politicians; politicians who represent us, the people, and not the corporate bottom line. The problem is that none of such individuals can make it in a system that requires campaign funds that can only be supported by corporate interests. Mike MD, Houston, TX

January 16 2014 at 11:35 PM Report abuse +2 rate up rate down Reply
brightsoulwooten

They have to give it to cities that want to get the homeless off the streets. Donate it. That is what the older statesmen did they came out even better. Give and you will receive. Corporations do not have to be greedy they can better the world by doing good deeds.

January 16 2014 at 10:39 PM Report abuse rate up rate down Reply
Davie2743

They are still hoarding all this money because they are too stupid to figure out where to put it.

January 16 2014 at 10:34 PM Report abuse -2 rate up rate down Reply
wbearl

US Corporations would love to invest that money, but with the Washington DC we have right now they don't know what to invest in. They are getting mixed signals. Invest in people? They have no idea what Obamacare is going to do to their bottom line. Increase productions, how much money do they need to set aside for next year? What are taxes going to be like? When we have a stable Government they will invest, spend and expand, not till.

January 16 2014 at 10:33 PM Report abuse rate up rate down Reply
crimeslawyer

Because they want to and it is nobody's business except their shareholders. Something the left will never understand because they somehow believe that everyone elses property should belong to the losers.

January 16 2014 at 9:27 PM Report abuse -3 rate up rate down Reply
Stanley

If the TPP is signed will see a lot more money going overseas along with the last of America's manufacturing jobs. Until the government gives businesses a reason to invest in America they'll keep their profits where they can't be taken by those who haven't passed a budget in 5 years but keep spending $200 million per hour we don't have!

January 16 2014 at 8:56 PM Report abuse rate up rate down Reply
1 reply to Stanley's comment
phillyboy

We have finally found the TRICKLE DOWN but it's not trickling down!!!

January 16 2014 at 9:04 PM Report abuse +1 rate up rate down Reply