Working Capital

Corporate Cash Earning Almost Nothing

Higher operating cash flows are leading to more excess cash, but companies are still reluctant to venture outside of low-yielding investments.
Vincent RyanJuly 19, 2016
Corporate Cash Earning Almost Nothing

While stronger operating cash flows cause the excess cash on many corporate balance sheets to build, companies are taking little to no risk with that cash and therefore earning little to no return.

The Association for Financial Professionals’ annual Liquidity Survey, released last week, found that companies are still holding vast amounts of cash in extremely low-yielding bank deposits and clinging to the objectives of principal preservation and liquidity, with absolutely no interest in earning yield on short-term investments.

According to the survey of 787 corporate finance practitioners, taken prior to Britain’s vote to leave the European Union, 55% of U.S. companies’ excess cash is maintained in bank deposits. Another 9% is in prime money market funds, 7% in government money market funds, 4% in Eurodollar deposits, 4% in Treasury bills, and 4% in commercial paper.

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For fifth year running, the survey has found that more than half of U.S. corporate cash holdings are in bank deposits, says Craig Martin, executive director of the AFP’s corporate treasurers’ council.

“[Companies] have gotten comfortable with their banks, and there is no yield anywhere else,” Martin says. “If there were a yield curve in the short term, between Fed funds and one-year, then I think the conversation between treasurers, CFOs, and boards of directors might be different.”

Indeed, with the Federal funds target rate at 0.25% to 0.5%,  money market funds are currently sporting annual yields of just 0.26% and two-year Treasuries are earning just 0.67%.

Treasurers could get even more conservative when new SEC rules on prime money market funds take effect in October 2016. Sixty-two percent of respondents said they would make changes in how they invest in prime funds as a result of the rules regarding floating net asset values and “gates” on investor redemptions.

Safety of principal continued to be the top short-term investment objective for 68% of organizations, compared with 65% in 2015, according to the AFP poll. Another 30% cited liquidity as their most important objective. Only 2% of survey respondents said the primary goal for their excess cash was yield.

“In all the research we do liquidity continues to be high up on the treasurer’s list of things they are paying attention to,” says Martin. To prepare for the unexpected, “the best thing to do is to have good liquidity, know your sources of funding, and have a sound balance sheet and capital structure,” he added.

Companies are staying ultra-conservative with their excess cash even though more of it is coming in the door. Almost one-third of practitioners reported to AFP that their organizations’ cash holdings within the United States increased from May 2015 to May 2016. And 25% predict their organizations will increase cash balances over the next 12 months (55% say excess cash amounts will be unchanged).

Driving the rise in excess cash levels the past 12 months were higher operating cash flow (cited by 64% of respondents), increased debt outstanding (24%), lower capital expenditures (16%), and retirement of debt (also 16%).

The aversion to risk and earning any yield is also evident in the way CFOs and treasurers are choosing which banks to hold their money at.

Ninety percent of survey respondents said their overall banking relationship is the primary driver in the placement of short-term investments. That’s up from 85% last year and 72% in 2014. Credit quality of the bank is the second most important driver (67%). Only 43% cited compelling rates offered on deposits as a driver in bank selection. Thirty-seven percent mentioned earnings credit rates — interest paid on idle funds that reduces banking fees.

Companies continue to hold vast amounts of cash outside the United States. Sixty-four percent of all companies responding to the survey hold some cash outside U.S. borders, and the number increases to 77% when only public held companies are counted. Most of those international cash holdings (71%) are in bank-type investments (including certificates of deposits and time deposits), AFP said.