Companies Are Piling Up Cash

The New York Times reports:

At least someone knows how to fill a piggy bank.

Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts.

That should be good news in an economy unsettled by rising energy prices, tightening credit, gyrating stock prices and declining values for the dollar and the family homestead. Indeed, the Federal Reserve chairman, Ben S. Bernanke, cited strong corporate balance sheets as a bright spot in the darkening forecast he presented to Congress last week.

Some analysts also speculate that these cash-rich companies may start sharing their wealth with investors through special dividends, providing welcome stimulus for the economy.

Corporate spending on equipment and other capital expenditures has declined as savings have soared, suggesting that companies could stimulate the economy now by going on a hiring and spending spree. But that raises worries among some analysts that companies will spend their cash unwisely, making them more vulnerable in the future.

The increase over the last decade in the amount of cash, as a percent of total assets, for the companies in the Standard & Poor’s 500-stock index has been steep. One study shows that the average cash ratio doubled from 1998 to 2004 and the median ratio more than tripled, while debt levels fell. According to S.& P., the total cash held by companies in its industrial index exceeded $600 billion in February, up from about $203 billion in 1998.

René M. Stulz, who holds the Reese chair in banking and monetary economics at the Fisher College of Business at Ohio State University, said research he conducted with two other professors on corporate cash levels since 1980 indicated that growing cash holdings over that period most likely reflected the simple fact that the world became a much riskier place for business.

“Companies responded to those rising risks by saving more,” said Professor Stulz, whose study excluded utilities and financial companies because their cash reserves are monitored by regulators.

An even longer savings trend was spotted by Jason DeSena Trennert, managing partner and chief investment strategist at Strategas Research Partners in New York, who said his own rough examination of corporate balance sheets shows that “cash, as a percent of total assets, is as high as it’s been since the 1960s.”

Look for politicians in the next several years to "erode" corporate savings through taxation.You can count on that.