The Quarterly Corporate Cash Report

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Rudolph Robertson
8 years ago
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1 The Quarterly Corporate Cash Report October 2011 Volume 2, Issue 1 Corporate Cash Tops $2 Trillion U.S. corporate cash and shortterm investments increased $88 billion in the second quarter of 2011, reaching an all-time high of $2.05 trillion. 1 Corporate cash remains 46% ($648 billion) above its level from the first quarter of This increase indicates that businesses continue to generate cash from operations, and corporate treasurers remain cautious about deploying current cash pools. 2,000 1,800 1,600 1,400 1,200 1, Sources: Federal Reserve Total U.S. Corporate Cash ($B) $2.05T Background U.S. corporate cash has grown at an unprecedented rate. The historical relationship between corporate cash and GDP has also changed materially over the last 10 years, and it continues to evolve as post-recession policies develop. The relationship change is further illustrated by the significant increase in corporate cash as a percentage of U.S. GDP.! 1,200 1, Growth in U.S. Corporate Cash and GDP ($B) U.S. Corporate Cash Sources: Treasury Strategies, Inc., Federal Reserve and BEA Note: 1Q 1980 = 100 U.S. GDP $2.05T 14% U.S. Corporate Cash as a % of GDP 12% 10% 8% 6% 1 $2.05 Trillion is an estimate noted by the Federal Reserve s Sept. 16, 2011 report, Flow of Funds Accounts in the United States. 4% U.S. Corporate Cash as a % of GDP Sources: Treasury Strategies Inc., Federal Reserve and BEA

2 Overview Based on conversations and surveys with over 250 U.S. clients, Treasury Strategies identified three key explanations for why cash remains elevated: 1. Cash flow from operations is strong, but Treasurers remain cautious. 2. Corporations are looking to invest in their businesses through capital expenditures and acquisitions, albeit at modest levels. 3. The number of corporations expecting cash to increase is declining, but still positive. 30% U.S. Corporate Cash Past 6 Months 28% 42% Increased Decreased Remained the same (within 10%) Corporate Cash Levels During the past six months, 42% of our U.S. clients increased their cash levels while 28% actually decreased their cash. U.S. Corporate Cash Next 6 Months In projections for the next six months, the distribution of companies planning to increase, decrease or stay the same is relatively even. Given this distribution, it appears likely that corporate cash levels will continue to grow, though at a much slower rate.! 39% 31% 30% Increase Decrease Remain the same (within 10%) U.S. Corporate Cash Next 6 Months! Sep-10! Dec-10! Mar-11! Jun-11! Sep-11! Expected Increase! 28%! 23%! 31%! 36%! 30%! Expected Decrease! 23%! 23%! 29%! 24%! 31%! Expected to Remain the Same! 50%! 53%! 40%! 40%! 39%! 2

3 The Past Six Months Cash Levels The majority of U.S. companies, 65%, indicated some change in their cash levels. This high degree of change over the last six months demonstrates that corporations are continuing to fine tune their liquidity equations. Drivers of Increased Cash Levels Positive cash flow from operations was noted by 86% of U.S. companies as either their 1 st or 2 nd most powerful contributor to increased cash over the last six months. Drivers of Decreased Cash Levels Over the past six months, capital expenditures and acquisitions were the two biggest uses of cash. Nearly 20% of companies had negative cash flow from operations. Looking forward, that figure falls slightly to 17% over the next six months, which suggests the number of companies losing money as a result of operational issues is declining.!! Drivers of INCREASED Cash Over Past 6 Months (U.S.) Positive cash flow from operations Debt issuance (medium- and long-term) Reduction of inventories Increased short-term borrowing Sale of company assets, divestitures Equity issuance Reduction in dividends 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% Drivers of DECREASED Cash Over Past 6 Months (U.S.) Capital expenditures Acquisitions Negative cash flow from operations Debt redemption (medium- and long-term) Paydown of short-term borrowing Increased inventories Equity repurchase, stock buyback Increased pension fund contributions Increased dividends or special dividends 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 3

4 The Next Six Months Looking forward, a number of signs indicate the business outlook is becoming more optimistic. Drivers of Increased Cash Levels Companies continue to expect strong cash flow from operations. Our clients indicate they will continue to run lean operations, and are limiting excess inventory in order to remain as liquid as possible in an uncertain environment. Drivers of Decreased Cash Levels In the next six months, our clients plan to use their cash to invest back in the business. Capital expenditures and acquisitions are at the top of the list. Many companies are also looking to take advantage of the low rate environment to refinance or pay off debt.! As a whole, these figures are a strong indication that cash is about to be re-deployed into the marketplace and businesses have plans to grow. Drivers of INCREASED Cash Over Next 6 Months (U.S.) Positive cash flow from operations Reduction of inventories Debt issuance (medium- and long-term) Increased short-term borrowing Sale of company assets, divestitures Equity issuance Reduction in dividends 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% Drivers of DECREASED Cash Over Next 6 Months (U.S.) Capital expenditures Debt redemption (medium- and long-term) Acquisitions Paydown of short-term borrowing Negative cash flow from operations Equity repurchase, stock buyback Increase in inventories Increased pension fund contribution Increased dividends, or special dividends 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 4

5 Changes to Corporate Cash Management As an indication that companies expect high cash levels to remain for a long time, we see many clients making substantial investments in their treasury infrastructure: 47% of U.S. clients plan to improve cash forecasting over the next six months, which may signal an increased need for meaningful intelligence and strategic business support. This finding is confirmed by our direct work with clients. We see companies demanding more accuracy and precision in all their cash management activities. 27% of U.S. clients plan to upgrade their treasury technology over the next 6 months. Such a large percentage of companies investing in treasury technology reflects the greater demand and responsibility that have been placed upon treasury. Corporations are using technology to improve their visibility to cash, bank balances, investment portfolios and counterparty risk. In conjunction with these investments in improved forecasting and treasury technology, companies are also formally modifying their risk management and investment policies. Regulatory Factors Impacting Corporate Cash The current regulatory and monetary policies are continuing to distort corporate investments. The interest on reserve balances at the Fed and the continued low-rate policy create incentive for corporates to continue holding balances in short-term investments versus investing further out on the yield curve. Additionally, the unlimited FDIC encourages companies to carry more cash, since it provides a relatively risk-free place for companies to hold their cash until rates rise. Treasurers continue to exercise more conservative portfolio management, both in terms of maturity and credit quality. Plans for Next 6 Months (U.S.)! Increase reliance on cash forecasting! 47%! Implement new technology for cash management! 27%! Formally modify investment policies! 17%! Formally modify risk management policies! 9%! Cash Type! Change in Amount! Risk Appetite! Operating Cash! Reserve Cash! Accumulation Cash! Stranded Cash! Note: The Four Types of Corporate Cash was first published by Treasury Strategie in Outlook on Liquidity Corporate cash is indeed at record levels. However, based on our conversations with clients, the rate of growth will continue to decline due to such activities as capital expenditures, acquisitions and paying down debt. Companies need appropriate amounts of cash and access to credit in order to fund working capital requirements. Companies continue to make rational, individual decisions regarding inventories, capital expenditures, borrowing, debt repayment, acquisitions and dividends within the context of their operating cash flows. Such responsible actions have kept companies in good operating condition through a tremendously challenging economic period.! 5

6 About Treasury Strategies, Inc.! Treasury Strategies, Inc. is the leading Treasury consulting firm working with corporations and financial services providers. Our experience and thought leadership in treasury management, working capital management, liquidity and payments, combined with our comprehensive view of the market, rewards you with a unique perspective, unparalleled insights and actionable solutions. For more information, visit Chicago 309 W. Washington, 13th Floor Chicago IL London 1 Northumberland Avenue Trafalgar Square London WC2 N5BW New York 61 Broadway, Suite 905 New York, NY 10006! Copyright 2011 Treasury Strategies, Inc. All rights reserved!

The Quarterly UK & Eurozone Corporate Cash Report

The Quarterly UK & Eurozone Corporate Cash Report October 2011 Volume 2, Issue 1 Corporate Cash Remains Near Record Highs UK and Eurozone corporate cash and short-term investments remain near all- time