Fascinating analysis by Thomas McManus of Banc of America Securities regarding the cash rich balance sheets — estimated as high as a trillion dollars — of Corporate America.
McManus observes:
"Who owns all of this cash and what are they likely to do with it? Well, the enormity of some of the figures that are widely discussed — we reckon that the S&P 1500 companies (excluding companies that are classified as financials) control $900 billion cumulatively in cash and equivalents — is whetting some investors’ appetites.
But we see today’s balances as less significant than widely believed. Most of the stash is concentrated among very few companies. Fully 25% of the $900 billion is held by only 10 companies, and 29 more control the next 25%.
Business balance sheets may appear healthier these days until one considers the funding status of defined benefit pension plans, which has become more onerous as low long-term interest rates have raised the present value of future liabilities." (emphasis added)
Quite a revealing statistic . . .
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Source:
Are Corporations Truly Flush with Cash?
INVESTORS’ SOAPBOX PM
Barron’s MONDAY, AUGUST 22, 2005 4:04 p.m. EDT
http://online.barrons.com/article/SB112472588480219622.html
therefore, almost forty corporations own fifty percent of the nine hundred billion dollar profit treasures, while the rest of the four hundred and fifty billion dollars are fed to the remaining ‘x’ amount of corporations that are involved in the dog-fight for a pie of the profit pie…
with all of the advanced ‘theories’ and talking heads about investment and economics on the business front, what does this statistic truly mean to the average individual confused by the pundits extolling a bull-market…? and most of all, what does this indicate about the current economic drag and dredge of the current economic system of america..?
couple ideas:
1. pensions –> U.S. Congress passed some new legislation on pensions. This is complicated. It would be interesting to input from others.
http://edworkforce.house.gov/issues/109th/workforce/pension/ppasummarylong.htm
2. cash –> companies may get higher returns when they are more leveraged (tax shields). Look for more M&A that lead to consolidations or divestitures. M&A may provide a floor to stock prices: companies get bought out at the current per share price or higher. We see this happening at Gillette. This is just the start.
For investors, it means one reason stocks might not totally tank. Big companies might buy them.
all the cash also might mean more increases in cash dividends or stock buybacks.
Corporations are in decent shape, compared to Individual consumers, who have decided to gamble all of their savings on Real Estate. Their homes have become theit ATM’s, in the sense that they use them to extract cash, and they think they need no savings. They feel that housing wealth is enough to carry them through any crisis.
This attitude is highly dangerous, as is explained more thoroughly in my article from Financial Sense:
http://www.financialsense.com/fsu/editorials/2005/0817.html
The WSJ had a piece about the same thing last week (I think it was in Justin Lahart’s column). The article mentioned Ford, GM, and GE as members of the cash-rich crew and observed that these companies include financing as a major part of their business and needed to retain the cash in order to maintain their credit ratings.