{"id":2435,"date":"2011-06-07T17:06:06","date_gmt":"2011-06-07T21:06:06","guid":{"rendered":"http:\/\/www.credittrends.com\/blog\/?p=2435"},"modified":"2011-06-07T17:06:44","modified_gmt":"2011-06-07T21:06:44","slug":"corporate-cash-all-that-glitters","status":"publish","type":"post","link":"https:\/\/www.credittrends.com\/blog\/2011\/06\/07\/corporate-cash-all-that-glitters\/","title":{"rendered":"Corporate Cash….All that Glitters"},"content":{"rendered":"

All that Glitters\u2026\u2026..<\/strong><\/p>\n

 <\/p>\n

A recent report out of McKinsey in Co.(McKinsey Quarterly, May 2011) stated European and U.S. companies hold excess cash on the order of $2 trillion. The general point of the article is how companies\u2019 should begin paying back its shareholders given the large excess funds they both hold and will continue to produce.<\/p>\n

I find McKinsey\u2019s arguments to be both an exaggeration and misleading for the following reasons:<\/strong><\/p>\n

1- The cash does not account for funds held in geographies which, if pulled would result in a large tax, in perhaps two countries. In fact, certain countries would not permit such payments at all.<\/p>\n

2- It does not account for needed working capital<\/p>\n

3-It does not account for debt due<\/p>\n

4- It does not take into account funds needed for expansion, or business combinations, R&D, or additional hiring.<\/p>\n

5- The desire to hold excess cash may be needed for other obligations, such as pensions, employee buyouts due to restructuring, commitments, or guarantees, both legal and moral.<\/p>\n

6- The authors do not explain why firms must distribute cash back at all, even if several years have passed awaiting opportunities. Capital gains has always proved the better after-tax reward.<\/p>\n

7-The authors defined excess cash as the amount of cash outstanding over and above operating cash, which is defined at 2 percent of revenue. This is clearly a poor definition of excess cash.<\/p>\n

 <\/p>\n

What the article does correctly point out, however, is the net effect on the firm value of share repurchases is zero. This is a subject I have long ago pointed out. Share buybacks improve accounting metrics, but do nothing to improve ROIC.<\/p>\n

 <\/p>\n

My point is the amount of excess cash is not nearly that amount claimed. I strongly believe a secondary reason for the US economy and stock market free-fall just a few short years ago were the massive buy-backs, which, by eating up capital, only served to deepen the credit crisis while driving some pretty large institutions out of business. I believe shareholders would have earned greater than 3% over the past five years had companies acted more prudently, and invested in assets and projects earning a safe spread between ROIC and cost of capital than depleting cash and equity.<\/p>\n

 <\/p>\n

Buybacks have not proved to be a \u201creward\u201d to shareholders, as managers and too many investors and stock analysts, claim the programs to be.<\/p>\n

 <\/p>\n

For more information on this subject, contact Kenneth Hackel or consult \u201cSecurity Valuation and Risk Analysis.\u201d<\/p>\n

 <\/p>\n

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All that Glitters\u2026\u2026..   A recent report out of McKinsey in Co.(McKinsey Quarterly, May 2011) stated European and U.S. companies hold excess cash on the order of $2 trillion. The general point of the article is how companies\u2019 should begin paying back its shareholders given the large excess funds they both hold and will continue […]<\/p>\n

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