Puny economic growth and tight cost controls enabled companies to record a 2 percent increase in revenue and unchanged cash flow from operations in the year ended September 2012, according to Moody’s report. About $6 out of every $10 added to the cash pile has come from tech companies. High cash balances are positive credit factors and ensure companies can retire near-term maturing debt if the capital markets are disrupted and withstand deterioration in business conditions.
Apple alone is likely to be sitting on $170 billion of cash and liquid investments by the end of the year according to The Financial Times, lifting its share of the overall reserves from 9.5 percent at the end of last year to an expected 11 percent, according to the report. Apple, which announced its first dividend a year ago, is expected to boost its dividend in response to growing pressure from Wall Street and dissident shareholder Greenlight Capital for it to issue a new class of preferred stock to reward shareholders.
Given the enduring hard times, one might think that corporations have used up their cash since 2009. But real pretax corporate profits have soared, from less than $1.5 trillion in 2009 to $1.9 trillion in 2010 and almost $2 trillion in 2011, according to the federal Bureau of Economic Analysis (BEA). That is nearly $1 trillion of increased profits over two years, while actual taxes paid rose less than a tenth as much, BEA reports show. Dividends, wages and capital expenditures all grew less than profits, while undistributed profits rose. The result: more cash.
Bigger profits are good news, but it would have been better news had those increased profits been put to work, not laid off in accounts paying modest interest. Hoarding corporate cash in bank accounts, Treasuries and tax-exempt bonds poses a serious threat to the economy, as Congress recognized when it enacted the corporate income tax in 1909.
Avoiding tax from overseas operations have resulted in rich tech firms channeling revenues through low-tax off-shore venues. Profits earned overseas which incur little or no tax face levies up to 35 percent when returned to the U.S. U.S. CEOs like Cisco’s John Chambers argue for tax reform to allow companies to bring back cash to the U.S. Many policy experts say this is unlikely to change in the near future given the fiscal situation in Washington. But business leader and others say the cash hoard could fund a lot of home investment in plants and new jobs, something the economy desperately could use. Also, some observers argue that growing cash is burning a hole in the pockets of some companies causing them to do things that are probably not in the best interest of creating shareholder value, such as making expensive acquisitions and aggressive share repurchase activity.