Analysis: Corporate cash may not all flow back with recovery

Wed Jan 22, 2014 6:43am EST
 
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By Mike Dolan

LONDON (Reuters) - When the corporate cash dam bursts, everything will be ok, right? Well, maybe.

Investors betting that the past year of more than 20 percent gains in western stock markets can be echoed, or at least sustained, through 2014 have long assumed that a corporate spending revival will nurture a building economic recovery.

The argument is simple. Years of banking crises, credit droughts and economic uncertainty have prevented businesses investing for the future. Instead, they have clipped costs, wages and jobs and built up huge stockpiles of cash rather than investing in new plants, staff, updated technology, equipment or acquisitions.

As the economic fog lifts, this idle, near zero-yielding cash will surely be put back to work eventually, they argue, creating a potentially virtuous circle of greater demand, higher growth, earnings and employment all round.

The problem, however, is that assumes cash stockpiling has all been due simply to a hiatus in the economic cycle. Many argue the hoarding is instead driven by more durable demographic trends and political reforms that are stirring corporate anxiety about exposure to soaring pension and healthcare costs as workforces age and government coffers shrink.

If that's true, then this brewing economic recovery may not release pent-up business cash on any scale close to that suggested by the eye-popping cashpiles.

According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 - more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years.

To be sure, some of this money has been eked back to shareholders via buybacks and dividends over the past year or so and there was also a small flurry of mergers and acquisitions late last year. But M&A as a share of market capitalization remains lower than it was in 2002, JPMorgan data shows, and share buybacks are also below historical averages.   Continued...

 
U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013. Picture taken August 2, 2013. REUTERS/Kim Hong-Ji