Companies Hoard Cash

Links:
WSJ Article: http://online.wsj.com/article/SB125712303877521763.html
Bloomberg Article: http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=C%3AUS&sid=aoegJmRxtzQA


Companies are hoarding cash at levels not seen since the 1960s. According to an article titled Jittery Companies Stash Cash in the November 2nd Wall Street Journal “500 of the largest nonfinancial companies…held about $994 billion in cash, or 9.8% of their assets”. That is 2% more than last year. Now, we all remember the 3.5% growth in GDP last week, so why are companies saving cash?

Some explain this phenomenon as a “hangover” from the recession, while others claim that firms are inherently “riskier” these days. Among the 500 largest nonfinancial groups, information technology groups carry the most cash. The Wall Street Journal explains that “the 54 biggest information-technology firms held $280 billion – or 27% of their assets – in cash” citing Google as an example; “The search giant’s cash and short-term investments rose 53% to $22 billion in the third quarter from a year earlier, accounting for 58% of its total assets”

Although holding cash provides a safety net and “operating and strategic flexibility,” it begs the question of whether that cash could be put to better use in a possible future bull market. Now making market predictions could be dangerous business, but holding cash could stifle a company’s growth in a globalized market. On the other hand, holding cash could provide companies a quick source of liquidity in unsure financial times. Also, without ready access to credit, “cash can become very strategic”.

In a recent Bloomberg article, the author claimed that Citigroup and JP Morgan were “hoarding cash as if another crisis were on the way”. The article explains how Citigroup has nearly doubled its holdings in cash. Although hoarding cash may be the safe move, “it will take down the rates of returns these companies can generate” said Eric Hovde in the Bloomberg article.

This action brings into question whether banks should value rate of return over a safety net. On one hand, a safety net would ensure Citigroup’s existence and financial safety while recovering from a financial crisis. While on the other hand, investors responded to Citigroup’s diminishing rate of return through a massive sell-off on Monday. Is a bank without a decent rate of return worth investing in? Is a bank without ability to secure cash worth investing in? How much of Citigroup’s rate of return must be sacrificed for adequate financial security? We believe these questions are at the heart of Citigroup’s decision to hold more cash.