Story Originally Appeared in US TODAY
You've probably had this problem before. You've woken up from your bed of freshly ironed $100 bills, and had to pick your way around dozens of bags of coins just to get to the closet. And once there, you can't find a shirt because of the stacks of fifty-dollar bills stuffed to the ceiling.
Darn it! You just have too much cash.
Well, perhaps you haven't had that problem. But a growing number of companies have an astonishing amount of cash, and they just don't seem to know what to do with it.
Sooner or later, shareholder grumbling may force them to dip into the massive amounts they have tucked away in cash or equivalents, earning very little. For investors, the question isn't whether they will spend it well, but who will benefit. And the most obvious answer is the investment banks.
Much of Corporate America is awash with cash. According to S&P Capital IQ, 202 members of the Standard and Poor's 500-stock index have $1 billion or more in cash. Incidentally, that number takes out banks, which use and keep cash on hand differently than, say, a plastics maker.
General Electric is the nation's largest corporate cash hoarder, with $77.4 billion, according to its most recent quarterly report. But GE does a lot more than make toasters, and it has a huge investment banking arm in GE Capital, so it probably should be excluded from the list as well. The next big cash companies are fairly well known and widely held:
• Chevron, $21 billion.
• Apple, $16 billion.
• Johnson & Johnson, $14.9 billion.
• Google, $14.8 billion.
• Hewlett-Packard, $13.6 billion.
Other members of the billionaire's club are probably less known. Nucor, the steelmaker, has $1.1 billion in cash and equivalents. Union Pacific, the railroad, is sitting on $1.1 billion as well. Kraft has $1.2 billion. Coca-Cola? $8.4 billion.
And, in case you're wondering, having all that cash is unusual. Companies overall in 1980 had $234.6 billion cash, adjusted for inflation, according to a paper by Amy Dittmar at the University of Michigan's Stephen M. Ross School of Business and Ran Duchin at the University of Washington's Michael G. Foster School of Business. That's about 12% of assets. Cash holdings grew to $1.5 trillion, or 22% of assets, in 2011.
Why do companies have so much cash? The easy answer is record profits. In 2012, S&P 500 companies racked up earnings never before seen in history. And tax law encourages multinational companies to keep overseas profits overseas.
But Dittmar and Duchin suggest that our captains of industry aren't terribly different than anyone else. Financial managers who have gone through a soul-searing downturn – such as what we saw during the 2007-2009 bear market – have a special reverence for cash.
"We find that CEOs who were previously employed at a firm that experienced financial difficulties have a cash-to-assets ratio that is 3.1 to 4.4 percentage points higher compared to firms whose CEOs did not experience financial difficulties," Dittmar and Duchin write. While this may have helped their companies through hard times, it may not be the correct strategy for less hard times like now.
Many companies are using their cash to increase dividends or buy back shares – two strategies that can reward investors, but do precious little to actually grow the business. You could make the argument that managements with lots of cash that only increase dividends or buy back shares are simply fearful and lazy, and more concerned with their stock price than with growing their core business.
But if the economy were to slow, it would be a particularly swell time to have lots of cash on hand. If you do, you can poach employees from competitors at a relatively reasonable price, for example, invest in equipment that will make your products more efficiently, or invest in new products that will pay off when the economy is growing faster. Plus, doing any of these during the boom times always costs more.
The technology industry has the highest cash levels – about 40%, says Howard Silverblatt, senior index analyst for Standard and Poor's, which is unusually high even for the normally cash-rich industry. "Cash levels are knee-high, if not waist-high," he says. Health-care is the next most cash-rich, with about 20% in cash.
Naturally, there's always the possibility that companies will spend cash poorly. Companies nearly always overpay for acquisitions, for example. "When there are battles over companies, it's like being in a poker game when everyone has a lot of money," says Silverblatt.
As an investor, you want to own shares of the company fought over, not the company doing the fighting. Two funds, the Arbitrage Fund (ARBCX) and Merger (MERFX) make good, if unexciting, returns by buying shares of the target company after a merger is announced. They also sell short the acquiring company (short selling is a bet on falling stock prices).
A more aggressive way to take advantage of companies' cash is to buy shares of investment banks, such as Goldman Sachs (GS) and Morgan Stanley (MS), both of which have outperformed the S&P 500 index this year. Investment bankers collect fees for mergers and other events -- and win no matter who buys who.
In the long run, corporate cash is a good thing. Should they spend wisely, more people will have jobs, more people will get raises and the economy should start humming again. The question is when will companies open up their wallets.
"It's not that they don't have the cash to spend," Silverblatt says. "It's that they are choosing not to."
