Hoarders Once Again

Many companies are back to the habit of holding on tightly to their cash reserves. Is a softening in business confidence to blame?
Vincent RyanJuly 27, 2015
Hoarders Once Again

Many companies in the United States built short-term corporate cash balances at a far quicker pace during the second quarter of 2015, “signaling a significant softening in their business confidence,” according to the Association for Financial Professionals’ Corporate Cash Indicators®  survey. And they plan to continue doing so over the summer months.

The difference between the percentage of respondents whose firms increased cash holdings quarter over quarter in Q2 and those who depleted cash balances was +18, and year over year the reading was +13. The quarter-over-quarter number was the highest since January 2014.

The cash buildups occurred despite a small plurality of respondents telling the AFP last quarter that they expected their cash holdings to drop in Q2.

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“This is the third consecutive quarter where organizations’ actual behavior in strategically investing their corporate cash has not aligned with their expectations entering the quarter,” according to the AFP press release.

AFP’s assessment of the numbers is that “despite their optimism entering the quarter, subsequent developments have caused companies to lack confidence in the global economy, making them hesitant to deploy and invest cash for the long term. The prevailing uncertainty can partly be attributed to the highly anticipated interest rate hike by the Federal Reserve Bank later this year, as well as to the financial crisis in Greece, the slump in China’s economy and markets, other instances of global unrest, and regulatory uncertainty in the [United States].”

The positive side, of course, is that these companies have positive cash flow or have raised capital in the form of equity or debt.

For the third (current) quarter, a greater percentage of respondents (+11) are planning to increase their cash holdings than decrease them.

At the same time, few plan to change how they invest surplus cash — the AFP’s indicator of short-term cash investment aggressiveness stood at 0 in the second quarter, “indicating companies were maintaining a steady approach with their short-term investments,” the AFP said. (To get the reading, the AFP subtracts the percentage of respondents who indicate “more conservative” from the percentage that indicate “more aggressive” cash investment strategies.)

Why care about trends in cash holdings?

As the AFP notes, “confident companies use their cash to make growth-[oriented] expenditures (e.g., increased capital expenditures, merger & acquisitions and hiring) and to increase dividend payouts and share repurchases. Conversely, pessimistic executives are apt to sit on their cash holdings as they fret about their companies’ future prospects.”