Engineering News

Flush with cash, corporate America sits tight
Fri Feb 25, 2005 10:28 AM ET
By Daisuke Wakabayashi and Reshma Kapadia

BOCA RATON, Fla./NEW YORK, Feb. 25 (Reuters) - Corporate America is generating cash at near record levels, but the lessons of past investments turned sour are prompting companies to adopt a more conservative approach with spending.

Some economists are even calling the cash buildup a "cash bubble" and, while share buybacks and dividends are returning some of the cash back to shareholders, many companies just don't know what to spend their money on.

"Nobody has a really good idea on how to deploy capital," Gail Fosler, the Conference Board's chief economist, said at the Business Council meeting in Boca Raton, Florida.

"At the end of the 1990s, we had excess investment and now we've got excess cash flow."

S&P 500 companies are currently sitting on $601 billion in cash and cash equivalents. Before Microsoft Corp's $3 a share dividend payout last year, balance sheets were loaded with record levels of cash, according to Standard & Poor's.

"There is a very big opportunity to properly and wisely invest the money and also the opportunity to irresponsibly invest the money," said Howard Silverblatt, S&P equity market analyst.

If companies need examples of cash poorly spent, they only need to flash back to the spending spree of the 1990s when technology firms splashed out to build out an infrastructure for the Internet and many firms overpaid for acquisitions to fuel growth.

Cash to market value for S&P industrials sits at about 7.3 percent, compared to the recent average range of 4 percent to 6 percent and the 2.5 percent in the dot-com heyday of 1999, according to S&P.

"At the end of the day (the cash) gives companies a higher degree of comfort," said David Francis, vice president of equities at Thrivent Investment Management.

CASH COWS

On the back of several years of belt-tightening, corporate earnings are strong, cash flow is healthy and capital expenditures are at modest levels.

For example, General Electric Co. forecasts cash flow from operations to reach $16.5 billion in 2005 versus capital expenditure of $3 billion, or less than 2 percent of the company's total revenue.

GE executives say its cash flow provides the financial flexibility to bankroll $30 billion in dividends, $15 billion of share repurchases and a relatively moderate $9 billion to $15 billion for acquisitions over the next three years..

Last year, companies increased dividends and spent record amounts for share repurchases, but reinvestment through capital expenditures and acquisitions were at the lowest levels in a decade, according to a survey from Goldman Sachs.

But the tide may be turning. That same Goldman survey -- compiled by its analysts earlier this month -- sees companies more interested in funding growth than returning capital to investors.

Rockwell Collins Inc., a maker of communication and navigation systems for commercial and military use, said acquisitions are the priority for its cash allocation.

The company prefers active share repurchases to an increase in dividends, because buybacks offer more flexibility.

"If we see an acquisition, then we can shut down a share repurchase program a lot faster than a dividend program," said Rockwell Collins Chief Executive Clay Jones.

The ongoing debate over the wisest deployment of cash is unlikely to subside, since nearly 85 percent of CEOs surveyed by the Business Council forecast earnings to grow over the next 12 months.

DuPont CEO Charles Holliday said excess cash flow concerns are an acceptable byproduct of success.

"What a good problem to be talking about," said Holliday. "As opposed to a just a few years ago we were talking about how many companies might not make it."

Source: Reuters

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