Thursday, February 14, 2013

Is it spend spend spend again?

Apple has a problem, too much money. Apple is the richest company on the planet. Apple has accumulated $137 billion pile of cash. In the last quarter alone it added including $23 billion to its cash flow from operations. Early last year, Apple's cash balance had built to a point beyond what they needed to run their business, so they announced a plan to return $45 billion to shareholders over three years. As of this week Apple has executed $10 billion of that plan.

Another company suffering from an embarrassment of riches is the Australian Commonwealth Bank. Its half-year cash profit of $A 3.78 billion. This represents a profit of $20.7 million a day, $865,384 an hour or more than $14,000 a minute.

Cisco also holds an impressive cash hoard, which now sits at $46.4 billion. Cisco earned $2.7 billion on $12.1 billion in sales for the second fiscal quarter.

We could go on by corporation by corporation. Ex-Bank of Canada Governor Mark Carney and soon-to-be chief of the Bank of England chastised business managers last summer for sitting on vast piles of “dead money”.  Companies everywhere have stashed away record sums, waiting for brighter times of rising demand and mindful that the cash-rich weathered the recession in far better shape than their competitors. Across the developed world, corporations have filled their coffers with as much as US$ 8-trillion in cash – nearly 60 per cent of it in the U.S. – according to one estimate.

 According to the Federal Reserve, as of the third quarter of 2012 nonfinancial corporations in the United States held $1.7 trillion of liquid assets – cash and securities that could easily be converted to cash.  Nonfinancial corporations historically held liquid assets of 25 to 30 percent of their short-term liabilities. But this percentage began rising in 2001 and now tends to be in the 45 to 50 percent range. In the third quarter of 2012, it was 44.9 percent. Juan Sánchez and Emircan Yurdagul of the Federal Reserve Bank of St. Louis looked at the ratio of cash to assets at all publicly held nonfinancial, non-utility corporations. They found that, historically, such corporations held cash equal to about 6 percent of their assets, but that began rising in 1995 and is now more than 12 percent.

Bank deposits hit records in Germany, Italy, the Netherlands, Belgium, Austria and Finland. Capitalists are putting their money in banks even as interest rates are at their record lows and it has enabled banks to bulk up on their own deposits by paying out such low rates.

What else can you do but hoard, if profit prospects by investing isn't promising. Too much investment leads to too much capacity, output or inventory, which only floods the market collapsing prices, compromising returns and profits further. However, the situation could change. Companies are beginning to put some of their cash stockpiles to work. “A huge amount of liquidity has been sitting in cash or negative yield bonds out of fear,” says one private equity executive. “As that recedes, a wall of money is flowing into financial assets.  Liberty Global, the US cable group declared that it would buy Virgin Media for $23.3bn, for instance. The surplus of cash that drove so many huge, flawed deals at the height of the boom may be back. Bain & Co, the consultancy, forecasts a “superabundance of capital” between now and 2020. It estimates that the world’s financial assets will outbalance its gross domestic product by 10 to one – it will have $900tn of financial assets compared with $90tn of GDP by 2020. The result will be “a world that is structurally awash in capital” chasing few opportunities. “Capital superabundance will increase the frequency, intensity, size and longevity of asset bubbles. The propensity for bubbles to form will be magnified as yield-hungry investors race to pour capital into assets that show the potential to generate superior returns,” the report concludes. Investors are not risking money on venture capital entrepreneurs but choosing well-known enterprises on a firm footing and using their earnings to gain better returns than cash or government bonds.

2 comments:

ajohnstone said...

Money to spend? Heinz bought for $28 billion by Warren Buffet and a Brazilian company 3G Capital.

ajohnstone said...

A buyer who snaps up a company selling for, say, 12 times profit is getting better than an 8-per-cent earnings yield on its money. That is far more than the 6 per cent or so yield on many junk bonds. In such a situation, a buyer could purchase the company, use part of the acquired firm’s earnings stream to cover the cost of financing the acquisition, and have plenty of cash left over to stuff into its own wallet.

http://www.theglobeandmail.com/globe-investor/investment-ideas/number-cruncher/15-cash-rich-companies-that-make-tempting-acquisition-targets/article8709298/