- S&P 500 companies are spending down cash to buy back their stocks, but most companies are following a more conservative path: hanging on to their cash as a hedge against global uncertainty.
- The Association of Financial Professionals' quarterly corporate cash survey shows companies are building cash reserves, continuing a trend that shows little sign of changing soon.
- The share of corporate finance managers who are accumulating cash increased 5 points in the second quarter, the AFP survey shows. Additionally, money managers expect to continue accumulating cash through the next quarter.
The AFP survey results, which involve a broad cross-section of companies, indicate continued uneasiness over global economic and geopolitical trends, according to Jim Kaitz, AFP's president and CEO. "The threats of a trade war with China, escalating immigration issues at the U.S. border and a looming Brexit are contributing to the unease of treasury and finance professionals," Kaitz said in a statement.
Jeff Glenzer, CTP, AFP's executive vice president, told CFO Dive that concern over global uncertainties is weighing on the minds of finance executives regardless of the industry they're in or the market reach of their company. "You don't have to be a multinational company acquiring materials from China to be impacted by tariffs on Chinese goods because of their impact on overall price levels," he said. "You don't need to have operations in Asia to be concerned about conflict in Korea. These macro factors impact everyone's decisions."
Kevin Kane, head of U.S. treasury and payment solutions at BMO Harris Bank, said the challenge is for companies to find additional ways to build liquidity. "Treasurers and CFOs need to remain diligent when it comes to managing their cash position," he said in a statement accompanying the survey results. That means "finding the right balance between building reserves as a hedge against uncertainty and deploying funds to take advantage of strategic opportunities, while also factoring in changes to the yield curve." BMO underwrites the survey.
S&P 500 companies, by contrast, aren't being so conservative. A Goldman Sachs letter to its clients last week said big companies are on track to spend down almost $1 trillion in cash in stock buybacks this year, a 13% increase over 2018, leaving big companies highly leveraged. "Unless earnings growth accelerates materially, companies will likely continue to fund spending by drawing down cash balances," said David Kostin, chief U.S. equity strategist at Goldman Sachs and lead author of the letter, reported by CNBC.
From a broader economic perspective, it would be better if companies invested their cash to increase long-term growth, Glenzer said. "I think what we really need to see, if we're looking at financial performance, is more companies investing their cash in economically beneficial activities — hiring, building new plants, making capital investment," he said, "not just buying back their own stocks."