Growth in Corporate Cash Balances Isn’t Negative

The cumulative cash balance of non-financial companies in the S&P 500 index totaled an estimated $2.1 billion as of October 31, 2015. There is not a single reason for the large cash balances; rather, there are many different reasons, some of which contradict commonly held beliefs.

The cumulative cash balance of non-financial companies in the S&P 500 index totaled an estimated $2.1 billion as of October 31, 2015, according to data compiled by J.P. Morgan. Though large, the majority of the cash is held by a small number companies. The 50 non-financial S&P companies account for 70% of the total cash. The 10 largest cash holders account for 40%.

There is not a single reason for the large cash balances, according to authors Mark Zenner et al. Rather, there are many different reasons, some of which contradict commonly held beliefs.

Among the observations made by Zenner et al. are:

• Cash Isn’t Just Growing Offshore: During the three-year period of 2012 through 2014, cash held domestically by S&P 100 companies has increased by 3% annually. Though foreign cash balances have grown at a higher 15% rate, foreign companies have also boosted their cash balances.

• Business Risk Is Playing a Role: Companies whose stocks experience above-median levels of volatility hold 50% more cash than companies with less-volatile stocks. This may imply greater conservatism on the part of executives following the 2008 financial crisis and in recognition of other company-specific risks.

• Corporations Are Still Investing in Themselves: Even with the buildup of cash, capital expenditures, spending on research & development and spending on merger & acquisitions increased at a 7% to 8% rate between 2011 and 2014.

• Executives Are Managing the Impact of the Larger Cash Balances: The 25 largest holders of cash have increased their use of longer-term investments by 15% in recent years. This is nearly double the 8% growth rate for other non-financial S&P 500 companies. This said, the majority of cash is still in bank and money market accounts.

• Debt Levels Are Mostly Unchanged: Companies that have avoided repatriating overseas cash have raised debt in the U.S. to accommodate domestic cash outlays, such as dividends and share buybacks. This has been offset by higher overall cash balances. As a result, aggregate leverage levels are near the same levels as five years ago.

Source: “Are U.S. Companies Really Holding That Much Cash—And If So, Why?,” Marc Zenner, Even Junek and Ram Chivukula, Journal of Applied Finance, Volume 28, Issue 1, Winter 2016.