Posted on: Sunday, September 12, 2004

Corporate America hoarding cash

By Russ Wiles
Arizona Republic

The recent decision by Microsoft Corp. to launch a $75 billion stock-buyback and dividend program is a sign of a new reality: Corporate America is flush with cash.

A rare confluence of factors — cost cutting and uncertainty about the future mixed with an economic upturn and record profits — has convinced top executives that it's best to hoard cash like squirrels stashing nuts for the winter.

Nationally, 500 of the largest companies are sitting on a record $582 billion in cash and liquid, short-term investments, said Standard & Poor's Corp. in New York. That's up from $500 billion at the end of 2003 and $261 billion in 1999.

Corporate profits, now at record levels, partly explain why so much cash is piling up.

"At the same time, corporate managements have been beaten up in recent years over the stock market, recession and other issues," said Jonathan Golub, U.S. equity strategist for J.P. Morgan Fleming Asset Management in New York. "They've become sheepish about taking any aggressive behavior, whether it's making an acquisition, reinvesting the capital or something else."

Phoenix retailer Petsmart Inc. has seen its cash level jump eightfold in three years. Timothy Kullman, chief financial officer, said rising profits spurred by changes in Petsmart's distribution strategy and better inventory controls help explain the improvement.

"If you carry less inventory per store and you turn it more often, it creates less need for cash and improves your cash balance," he said.

Rising cash balances present executives with expanded opportunities but also saddle them with added responsibilities. The best choice among paying dividends, reinvesting in existing businesses, buying back stock or pursuing acquisitions isn't always clear-cut.

Barbara Walchli, Phoenix-based manager of the Aquila Rocky Mountain Equity Fund, sees signs of cash-rich firms seeking to spend more on acquisitions, for better or worse.

"The track record of mergers ... is miserable," Walchli said.

Dividend payments are another option. This choice has been made more attractive by new, lower tax rates and by a sluggish stock market with seemingly diminished potential for capital appreciation.

But dividends aren't always the best move, either. They can signal to shareholders that management views a company's future as uninspiring.

Capital spending is yet another use of cash, but with the economy still sluggish and factory utilization modest, corporate executives are in no rush.

One factor that has persuaded some to boost and maintain high cash levels is economic uncertainty, including terrorism fears that sap consumer confidence.

America West Holdings Corp., parent of the airline, has used federal loan money and profits to do just that. Its current $348 million cash balance is the highest for a second quarter in the company's history, spokeswoman Elise Eberwein said.

"With soft fares and high fuel prices a risk, you've got to have that cushion of cash," she said.

While rising cash balances boost the pressure on executives to make the right moves, this is still a good position to be in. It's also a possible precursor of future economic growth.

"There are really only three things companies can do with all the money — hire more people, invest in infrastructure or give it back to shareholders," Golub said. "All three are good for the economy."