Saturday, June 19, 2010

Corporate Cash Levels Continue To Grow

Until several quarters ago, cash on corporate balance sheets remained at a fairly stable level. Recently though, companies have been growing cash balances. A recent Wall Street Journal article noted,
"...nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963."
As the two charts below note, cash has been increasing on an absolute dollar basis (first chart) and also as a percentage of a company's debt level (second chart). For S&P 500 companies, debt has grown by 5.6% over the past two years whicle cash has grown by 42.6%.

With a recent strengthening of the US Dollar versus the Euro and higher capital gain tax rates coming, US companies may use some of the cash to support corporate acquisitions both here and abroad. This same type of scenario played out when then president Reagan adjusted taxes in 1987. Additionally, given the level of cash, companies have the ability to step up dividend payments and dividend growth rates.

At the end of the day, this cash growth does show company business prospects have improved. No doubt corporate level expenses have been cut as well, but growth in revenue and earnings is occurring. I suspect this revenue and earnings growth will continue through year end and into 2011.

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