In Today’s Economy, What is Corporate America Doing With All This Cash?

According to a FactSet analysis of S&P 500 companies, the collective total of cash reserves in corporate vaults for US nonfinancial companies reached a historic high $1.4 trillion during the fourth quarter. This total is nearly double its value from 2006, which was an estimated $820 billion. Quite naturally when you hear these figures, it would seem fair in asking what these companies are doing with so much cash in reserves.

Many would think it makes sense that these companies should give the economy a boost, right? Go on an economical spending spree so to speak. But not so fast. While it may seem like the most logical answer would be to take the funds and attempt to distribute them as far as they might reach, it’s not that simple. Corporate America faces a few dilemmas with these large cash totals. While of course they would like to kickstart job creation and invest in major projects for the future, the courage to spend isn’t there, but more importantly neither is the ability.

Source: Moody's

Source: Moody’s

One reality is that the cash reserves isn’t all money amassed from profits earned by the corporations. Quite a bit is money that has been borrowed. Alongside the $1.4 trillion in reserves, is a whopping $4.8 trillion in debt. Over the course of approximately six months, companies increased their cash reserves by more than $30 billion. However, during the 12 months that followed this increase in reserves, these same companies increased their debt by more than $201 billion. According to an interview with Richard Lane, senior vice president at Moody’s, “… companies increased their debt by a factor of six relative to cash growth.” Another important reality is where these reserves are located and the impact of movement. An estimated 60 percent of the cash reserves is located outside of the US and bringing it back over would mean being subject to as much as a 35 percent tax. This action alone would decrease their total reserves by nearly one-third.

The bigger picture is what the American corporations need to do with their cash reserves, but essentially aren’t going to be able to do. At least not to the extent they would prefer. They would like to increase their spending, create new jobs, invest in research and massive infrastructure updates. These are the actions that would spur growth and generate earnings, increasing their odds of reaching financial goals and most importantly keeping both their shareholders and stakeholders happy. Unfortunately, what’s most likely to occur is the cash reserves will be applied to the debt owed and odds are high that more money will be needed to pay towards the debts, leaving the American economy to foot the remaining bill.

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