From The Corporate Saving Glut in the Aftermath of the Global Financial Crisis
From Why Are Corporations Holding So Much Cash?
From FACTSET Cash and Investment Quarterly
Companies are holding on to the large sum of cash. Rather than capital investments (CAPEX), cash is being used for share buybacks, dividend payouts, mergers and acquisitions, and cash investments (short and long term).
From FACTSET Cash and Investment Quarterly
Key Sources of Research:
The Corporate Saving Glut in the Aftermath of the Global Financial Crisis
Joseph W. Gruber
Steven B. Kamin
This Draft: June 2015
The global corporate saving glut: Long-term evidence
Since my earlier posts on this subject there has been several new studies published highlighting weakness in business investments as one of the cause of slower economic growth and lower interest rates.
Other significant factors impacting interest rates are demographic changes, and slower economic growth.
I argue that there is mutual (circular) causality in weak business investment, slower economic growth, and lower interest rates which reinforce each other.
Decreased competition, increased concentration, corporate savings glut, share buybacks, paying dividends are also identified as factors.
Number of public companies have decreased significantly in USA since 1996 due to M&A activity. See the data below.
Increased Mergers/Acquisitions, Increased Concentration, Decreased Competition, Decreased Number of Public Companies, Share buybacks, and Dividend Payouts are multiple perspectives of same problem.
From The Incredible Shrinking Universe of Stocks
The Causes and Consequences of Fewer U.S. Equities
Key sources of Research:
The Low Level of Global Real Interest Rates
Board of Governors of the Federal Reserve System
Conference to Celebrate Arminio Fraga’s 60 Years
Casa das Garcas, Rio de Janeiro, Brazil
Longstanding IS-LM macroeconomic framework says that low interest rates should result in higher investment (as the cost of capital for investments declines). However, in practice it is not true. Business Investment also depends on many other factors such as profitability and projections for economic growth, market growth, and Industry/sector growth (in which a company operates). Low Interest rates also indicate low economic growth environment. In a low growth environment, having poor projections of future cash flows from new investments, companies can not justify domestic Investments if financial hurdle rates are not met.
Corporations also may have attractive options for investment outside the country. Free Trade agreements allow for business investments to move overseas for getting access to growing markets or for cost cutting reasons such as labor costs.
Instead of Investing in new capacity, companies are paying dividends, and buying back shares to boost share prices and doing acquisitions. Companies are using their own cash retained from earnings to pay dividends, buyback shares, and in some cases doing acquisitions. Debt-financed acquisitions are done through raising capital from capital markets.
Companies do not need to grow by new fixed investments when they can grow by acquiring other companies. Organic growth is the process of business expansion by increased output, customer base expansion, or new product development, as opposed to mergers and acquisitions, which is inorganic growth. Organic growth typically excludes the impact of foreign exchange.
There has been spectacular M&A activity in 2014, 2015 and is continuing in 2016.
In low economic growth and low interest rate environment, it may make more sense to grow by inorganic growth. The justification for M&A is usually the combination of reduced costs of doing business and increased revenue from greater market share. After completion of acquisition, acquiring company management may decide to rationalize business units – closing inefficient plants, laying off employees, combining overlapping internal corporate services departments. These decisions depend on the type of M&A strategy.
Economists need to pay attention to these trends as well. At present, there is no discussion of M&A activity in Economic Policy discourse among Economists and Policy makers.
Wall street data charts showing trends in Business Investments
From Jeff Cox / CNBC.com November 17 2016
Fed Chair Janet Yellen and her colleagues for quite some time have been bemoaning the low levels of business investment.
Pressed Thursday to explain why this has been the case, the central bank chief told Congress she wasn’t sure, but she denied it had anything to do with the Fed’s cheap-money policies of the past eight years.
“It’s not clear in my mind why it is that investment spending has been as weak as it is,” she told the Joint Economic Committee. “Initially, we had an economy with a lot of excess capacity. Firms were clearly operating without enough sales to justify a need to invest in additional capacity, and more recently with the economy moving toward full employment, we would expect to see investment spending pick up, and it’s not obvious exactly why it hasn’t picked up.”
Sen. Bill Cassidy, R-La., suggested that the fault may lie in what the Fed has done. Specifically, he pointed to the central bank’s quantitative easing measures that saw the Fed’s balance sheet surge to $4.5 trillion largely on three rounds of bond buying.
Faced with the uncertainty of returns from capital expenditures and the near-certainty of returns on assets like stocks and bonds during what Cassidy called “easy money” QE programs, businesses opted for the latter, he said.
“I wouldn’t agree that the Fed’s monetary policy has hampered business investment or been a negative factor,” Yellen responded. “I’m not aware of any evidence that suggests that it is.”
She explained that productivity has been on the decline since companies started reversing bare-bones employment levels during the financial crisis. However, that has not been met with business investment, in part because companies don’t believe it “will produce returns that justify those investments,” Yellen said.
Moody’s: US non-financial corporates’ cash pile increases to $1.68 trillion, tech holding the lead
Global Credit Research – 20 May 2016
New York, May 20, 2016 — US non-financial companies rated by Moody’s held $1.68 trillion in cash at the end of 2015, up 1.8% from $1.65 trillion the year prior, Moody’s Investors Services says in a new report. The top 50 holders of cash account for $1.14 trillion of the total cash pile, and entry to the top 50 list now requires $6.12 billion in cash.
“The top four cash-heavy US industries remain technology, healthcare/pharmaceuticals, consumer products, and energy,” says Richard Lane, a Moody’s Senior Vice President. These four industries currently hold a record $1.3 trillion, or 77% of total corporate cash and have accounted for more than 72% of the total every year since 2007.
The top five cash holders are Apple, Microsoft, Google, Cisco Systems and Oracle, Moody’s says in “US Non-Financial Companies: Cash Pile Grows 1.8% to $1.68 Trillion; Tech Extends Lead Over Other Sectors.”
Apple held $215.7 billion in total cash for the period. The company has held the top spot as cash king since 2009.
“While the concentration of cash among the top-rated cash holders continues to grow, so too has the portion held by the technology sector, which accounted for a record 46% of total cash in 2015, up from 41% in 2014,” Lane says.
Moody’s expects the technology sector cash concentration will grind higher over the next year because of the sector’s strong cash flow generation and despite stronger returns of capital to shareholders. The technology sector generated 63% of the total rated non-financial free cash flow in 2015, up from 37% in 2007.
For the top 50, capital spending fell by 3% to $885 billion, and net share buybacks fell 7% to $269 billion. Dividends increased by 4% to a record high of $404 billion, while acquisition spending increased 43%, to a record $401 billion.
For the first time since 2012, cash coverage of aggregate debt maturities over the next five years fell below 100% to 93% at the end of 2015.
In 2016, Moody’s expects aggregate spending on capital investments, dividends, acquisitions and share buybacks to again approximate $1.9 trillion.
From Wall Street Journal
From M&A experts weigh in on deals for 2017
From US M&A market on a high
Key ideas/issues for M & A:
Why grow through M & A activities ?
Limited organic growth options
Need to address the transformation in the marketplace/existing business models
Availability of credit on favorable terms
Large Cash reserves/commitments
Shifting consumer demands
Improving Equity markets
Opportunities in emerging markets
What are concerns?
Slow growth environment
Lack of suitable targets
Record stock prices
Constrained Consumer Demand
Rising Interest Rates
Return on Investment (ROI)
Return on Invested Capital ( ROIC)
Internal Rate of Return (IRR)
Weighted Average Cost of Capital (WACC)
Economic Value added (EVA)
Return on Assets (ROA)
Return on Equity (ROE)
Net Present Value (NPV)
Compound Annual Growth Rate (CAGR)
Capital Expenditures ( CAPEX)
Corporate Savings Glut
Business Fixed Investments
International Investment Position (IIP)
Direct Investment Position (FDI)
Key Sources of Research:
Business Investment in the United States: Facts, Explanations, Puzzles, and Policies
Remarks by Jason Furman Chairman, Council of Economic Advisers
September 30, 2015
Firms’ Investment Decisions and Interest Rates
Kevin Lane and Tom Rosewall
Investing when interest rates are low
By Timothy M. Koller, Jiri Maly, and Robert N. Palter