[Marxism] BW: Timid fat cats

Marvin Gandall marvgandall at rogers.com
Fri Jul 16 15:45:15 MDT 2004

The July 19th issue of Business Week reports that US corporations, stuffed
with record profits, remain reluctant to invest their “mountains of cash”,
which might be interpreted as a vote of non-confidence in the durability of
the current recovery. Inventories are at a record low and the pace of
capital spending hasn’t lagged this far behind  economic growth since the
mid-70’s. Instead, the magazine reports corporations are parking their cash
in “the equivalent of money-market funds”, suggesting they remain
traumatized by memories of the last recession, terrorist attacks, and
financial scandals.

Corporate hesitance, however. is owing more to economics than psychology.
The massive buildup of cash reserves points to the lack of opportunities in
an economy still plagued by overcapacity following the investment binge of
the 90’s, Balance sheets have been restored to profitability by deep cuts in
labour and capital costs rather than through expansion. Wall Street is
becoming concerned about the effect of anemic corporate spending on economic
growth, but is meantime pressing for a slice of the profits to be passed on
to investors through share buybacks and dividends.
Corporate Coffers Are Stuffed With Dough
By William C. Symonds
Business Week
JULY 19, 2004

Profits are up, but battle-scarred companies keep loading up on cash. Will
their caution hurt the economy?

Blessed with a lock on its markets, Microsoft Corp. (MSFT ) is one of the
greatest cash machines ever created. At the end of March, it had $56.4
billion of cash on its books. And that figure could swell to nearly $60
billion when it reports its fiscal fourth-quarter earnings on July 22. That
may be too much for even Microsoft's conservative chairman, William H. Gates
III. With its long-running antitrust troubles finally winding down,
Microsoft is expected to announce by the end of July a share buyback that
some suspect could be as high as $40 billion.

When it comes to its corporate piggy bank, Microsoft is in a league of its
own. But many other companies, flush with soaring profits, are also facing
an embarrassment of riches. At the end of the first quarter, the 374
industrial companies in the Standard & Poor's (MHP ) 500-stock index
collectively were sitting on $555.6 billion of cash and short-term
investments. That's up some $56 billion, or 11%, since the end of 2003, and
more than double what they had at the end of 1999.

This growing money pile could spell either opportunity or trouble for the
economy and investors, depending on what companies decide to do. With the
rise in consumer spending slowing, the economy needs companies to start
tossing some of those big bucks around to keep momentum from flagging. That
could happen as CEOs' moods brighten. The Conference Board reported July 7
that more than 90% of chief executives in its latest quarterly poll say the
economy has improved. If the corporate dollars start flowing, "there is yet
another shoe to drop in the expansion," Federal Reserve Chairman Alan
Greenspan recently told the Senate Banking Committee.

But, so far at least, instead of putting all this firepower to work -- by
pumping up capital budgets, upping the pace of hiring, restocking
inventories, or passing out bigger dividends -- companies are keeping much
of their powder dry. Rather than taking a risk, many would rather park their
cash in the equivalent of money-market funds -- never mind that they're
often earning a puny 1% return. The mood is one of "continued caution and
disciplined spending in the business sector," concluded a number of members
of the Fed's policymaking Open Market Committee at its May 4 meeting. "That
caution," adds Sung Won Sohn, Wells Fargo & Co.'s (WFC ) chief economist,
"is holding back economic growth."

Why aren't companies spending more? Blame it on the series of events that
knocked them for a loop over the past few years: recession, terrorist
attacks, financial scandals. After getting pummeled, companies slashed
expenditures and set out to boost their reserves. Now, with the economy
rebounding, this budgetary discipline is generating a huge surge in
earnings. Collective earnings for the S&P 500 reached a record annual pace
of $481.7 billion in the first quarter, and equity analysts predict the
record will be smashed as second-quarter earnings are reported in the coming

So far, though, companies have been unusually tightfisted with their new-won
wealth. Take capital spending. To be sure, it is rising. But since the start
of 2003, it has lagged far behind surging cash flows, something that hasn't
happened since the mid-'70s. Similarly, companies aren't restocking their
shelves anywhere near fast enough to keep pace with sales. That drove the
ratio of inventories to sales to a record low of 1.3 in April.

And after a hiring binge in early spring, employers pulled back and added
just 112,000 jobs in June, less than half the 250,000 that had been
projected. Despite the tech recovery, Cisco Systems Inc. (CSCO ) hired all
of 200 employees last quarter -- hardly enough to register on the radar
screen of a giant that employs 34,000. BellSouth Corp., which slashed 17,000
jobs over the past three years, has cut 2,200 more this year.

All this has produced mountains of cash. In fact, 24 of the 374 industrials
in the S&P 500 have at least $5 billion on hand. Many are tech companies,
such as Hewlett-Packard (HPQ ), Intel (INTC ), Cisco Systems (CSCO ), IBM
(IBM ), and Oracle (ORCL ). But other industries have lots of dough, too.
High oil and gas prices have pushed Exxon Mobil Corp.'s (XOM ) cash reserves
to $15.9 billion, second only to Microsoft. Health-care insurers and big
drugmakers also have the Midas touch.

While many execs argue they need the money in case the economy softens or
for strategic moves such as acquisitions, the problem with sitting on so
much cash is that it drags down a company's return on capital. Anthony J.
Carfang, partner at Treasury Strategies Inc., which advises businesses on
cash management, says he has seen "a huge swing of corporate assets into
money-market mutual funds," yielding less than 1%.

That's fueling a growing debate about when and what Corporate America will
do with this money. Companies have two basic alternatives. They can deploy
the cash to fuel growth, by stepping up capital spending, hiring more
workers, and acquiring other companies. Or they can return some of this cash
to investors, through higher dividends or by stock repurchases.

Microsoft may be the first to break the logjam in a big way. Preparing for
an imminent announcement on what he'll do with all of Microsoft's billions,
CFO John G. Connors says he has been talking to "lots of other companies,
bankers, and academics." The likely outcome, says Goldman, Sachs & Co. (GS )
analyst Rick Sherlund: a massive stock buyback of up to $40 billion. "I hear
them talking a lot about being tired of the stock at this level," he says.

Other cash-rich companies are planning acquisitions. Health insurer Anthem
Inc. (ATH ), for one, is wrapping up its $16.4 billion purchase of rival
WellPoint Health Networks Inc. (WLP ) and is mulling more deals with the $16
billion in cash the combined company will have on hand. "We continue to be
opportunistic," says Anthem Chief Financial Officer Michael L. Smith.

No one is more aggressive than BellSouth (BLS ) and SBC Communications Inc.
(SBC ), which are scrambling to finance the purchase of AT&T Wireless
Services (AWE ) by Cingular Wireless, which they jointly own. Neither has
enough cash to fully fund the $41 billion deal. So SBC has been selling off
assets, including a large stake in Danish phone company TDC (TLD ), while
BellSouth is planning to increase its debt.

But such bold deals are still the exception. Although
mergers-and-acquisitions activity is picking up, "we don't see a frenzied
environment in the near future," says Robert Filek, a partner in
PricewaterhouseCoopers' transaction services practice. "The risk of doing a
bad transaction far outweighs the desire to achieve a short-term improvement
in return."

A similar caution continues to impede what should be a far stronger surge in
capital spending at this point in the recovery. "There's still a negative
connotation associated with overinvestment, and that's depressing the rate
of capital spending," says James W. Paulsen, chief investment strategist for
Wells Capital Management. ExxonMobil Chairman Lee R. Raymond recently said
he'll hold capital spending to around $15.5 billion for the next couple of

True, many economists expect companies will loosen their purse strings as
the economy grows. A July 7 report from the National Association for
Business Economics notes that 41% of member companies plan to boost hiring
in the next six months, up from 34% in April. But while 61% expect to hike
cap-ex, just 13% foresee increases of more than 10%.

In this environment, some Wall Street strategists say it makes sense for
many companies to return more cash to investors. Among cash-fat drugmakers,
for example, "you have executives in a mature industry pretending they are
growth managers," says analyst Richard T. Evans of Sanford C. Bernstein &
Co. "The reality is that there are not going to be as many opportunities to
deploy that cash as the industry appears to be betting."

During the boom of the late '90s, the mantra was "Cash is trash." Now cash
is one of the few security blankets for wary CFOs. But if renewed respect
for cash makes execs feel more secure, it's hardly the best news for the

in Boston, with Jay Greene in Seattle, Rich Miller in Washington, Peter
Burrows in San Mateo, Calif., Joseph Weber in Chicago, and bureau reports

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