Despite the pre-fiscal-cliff wave of “special” dividends and stock buybacks at the end of 2012, companies are still hoarding cash at record levels. And some of them are doing so in overseas accounts as a completely-legal-but-sort-of-un-American method for avoiding US corporate taxes. Public companies’ cash balances amount to about $1.5T in total, more than half of which sits outside Uncle Sam’s jurisdiction. The latter piece has been getting a lot of press lately, but does it really matter?
President Obama is considering proposing — or, he is attempting to propose an idea to Congress in the hopes its members will consider — a “tax repatriation holiday” to entice companies to bring their cash back to America. The issue with “having money overseas” is that it cannot be reinvested domestically (they cannot use it to hire American workers). This is a bit of a sideshow, but the end result could be good for our economy.
Companies do not need to bring their cash back from overseas to hire people. There are many other ways to finance hiring, expansion, or research and development — issuing debt is just one. Recently we discussed Apple’s record sale of bonds, raising $17B at rates substantially lower than today’s. Many asserted that this was merely an exercise for the iPhone-maker to avoid paying taxes on the repatriation of its cash hoard in places like Ireland (where there is no corporate tax). However, there has been no tangible evidence suggesting this was Apple’s impetus for issuing debt.
But Apple isn’t the only company with a record cash stockpile — though six of the top ten cash hoarders are also technology giants (Apple, Google, Microsoft, Cisco, Oracle, and Qualcomm). The top five hoarders make up $350B by themselves. I wonder if, in the near future, we could see technology merge with some other industries that are in dire need of more efficiency — banking, autos, and energy, for instance? Can you imagine if Apple, already halfway to making your phone a wallet, got into banking? 25% of their $140B in cash would go a long way. Or slightly more realistically — if Google were to buy Tesla and added their self-driving technology to what is already the Car of the Year? Now we’re talking about a 21st Century America.
Sideshow or not, the argument for corporate tax reform is once again on the table. And that could be just one step towards maintaining, or regaining, our global competitiveness.
What’s a cash-rich CEO to do?
With such a large portion of their balance sheets sitting unproductive, CEOs are left with an interesting challenge — “What do we do with all this money?” There are several possibilities: (1) Reduce their outstanding share count through buybacks; (2) Pass additional cash flow through to shareholders via dividend/distribution increases; (3) Reinvest in their own businesses through research and development, hiring, and expansion; (4) Buy up their competition and/or companies in related businesses. So far this year we have seen a great deal of (1) and (2), but not so much of (3) and (4).
There has been some speculation in the financial media that CEOs — just like consumers — are uncertain about the current economic risks and are patiently waiting for calmer seas to make any big moves. Business doesn’t work that way, and CEOs didn’t get to be CEOs by being reactionary. Public companies answer to their shareholders and boards, and shareholders and boards don’t like to see cash sitting idly any more than you do. After all, it’s theirs…
There is only one way to fund an acquisition that’s cheaper than issuing low-interest debt, and that’s funding it with cash. My take is that there are already plans for all this cash, and that it could be the very thing that drives the next leg of this bull market.
Have a great evening…..
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main