U.S. Corporate Cash Piles Drop to Three-Year Low -- Update

Date : 10/06/2019 @ 19h28
Source : Dow Jones News
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U.S. Corporate Cash Piles Drop to Three-Year Low -- Update

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By Maria Armental 

U.S. corporate balance sheets continue to feel the impact of the 2017 U.S. tax overhaul, as companies pivot their capital allocation strategies in response to the new law.

Companies funneled record amounts of cash to stock buybacks, dividends, capital spending and acquisitions last year. As a result, U.S. corporate cash holdings fell to a three-year low of $1.685 trillion in 2018, according to a report from Moody's Investors Service Inc.

The drop in corporate cash hoards, the first since 2015, came as companies rushed to take advantage of lower taxes on foreign income.

Apple Inc., again the top cash holder, saw its cash pile drop 14% to $245 billion. Rounding up the top five were: Microsoft Corp., Alphabet Inc. and newcomers Amazon.com Inc. and Facebook Inc., which replaced Cisco Systems Inc. and Oracle Corp. in the top five.

Combined, the five companies held $564 billion, or 33% of the total nonfinancial corporate cash balance, down from $675 billion, or 34% in 2017, according to the report, which looked at 928 U.S.-based, nonfinancial companies.

Representatives for Alphabet, Microsoft and Amazon declined to comment. The other companies didn't return requests for comment.

"These cash holdings don't impress me much," said Bruce Bittles, chief investment strategist at investment bank R.W. Baird & Co., adding he'd like chief financial officers to direct more cash to capital investments rather than to stock buybacks.

"If you are looking for a long-term benefit for the economy and the stock, capital investment is what is going to get you there, not stock buybacks, which are short-term boosts," he said.

Many U.S. companies, particularly in the fast-growing technology sector, built up massive hoards of cash offshore as they opted to keep profits earned in foreign countries outside of the U.S. That strategy was largely motivated by U.S. tax law, which levied a 35% corporate tax, net of taxes paid in foreign jurisdictions, on money that companies chose to repatriate.

But since the 2017 tax-law overhaul, which imposed a one-time tax on accumulated foreign profits, some companies have shifted tactics, bringing some or all of that money home. Companies sent $664.91 billion of their foreign earnings back to the U.S. in the form of dividend payments in 2018, up from $155.08 billion the year before, according to data from the U.S. Commerce Department.

Cisco, which was a top-five cash hoarder last year, lost that billing in part because of such a strategy shift. The company last year announced plans to repatriate $67 billion of its foreign cash holdings, and deploy much of that cash on share repurchases and dividends.

The San Jose, Calif., company said it would continue to direct cash to deal making along with stock buybacks and dividend payouts to shareholders. "We are not a capital-intensive business," a Cisco spokeswoman said in an email.

Moody's analysts expect companies to continue tapping into the cash piles in the coming years as they pay down debt and boost returns to shareholders through dividend payouts and stock buybacks.

Apple, for example, has laid out plans to become net cash neutral, with an equal amount of cash and debt.

In February, the iPhone maker began a $12 billion accelerated share-repurchase program and has since boosted its dividend by 4 cents to 77 cents a share and raised its share repurchase authorization by $75 billion to $175 billion.

"Our priorities for cash have not changed over the year," CFO Luca Maestri said in a conference call in April, when the company released financial results for the first half of its business year.

As of March 31, Apple had about $225 billion in cash and a net cash position of almost $113 billion, Mr. Maestri said during the earnings call.

The Moody's report found that share repurchases, net of stock issuance, nearly doubled in 2018 to a record $467 billion, driven by strong cash generation and supported by the tax overhaul.

This year, it will still be a "healthy number," albeit likely not a record, as companies err on the side of caution, given apprehensions about the economic outlook, said Richard Lane, senior vice president at Moody's and the report's lead author.

Meanwhile, aggregate debt rose 1.4% to $5.655 trillion in 2018, the lowest increase in a decade, Mr. Lane said.

Still, leverage ratios improved on an earnings before interest, taxes, depreciation and amortization basis and as measured by free cash flow.

That means a company is more likely to be able to repay or refinance debt.

Write to Maria Armental at maria.armental@wsj.com

 

(END) Dow Jones Newswires

June 10, 2019 13:13 ET (17:13 GMT)

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