Large U.S.

Companies Are Not Sitting On Piles Of Cash

Hamilton Place Strategies
provides analysis, communi-
cations, and advocacy solu-
tions at the intersection of
business, government, and
media.
Hamilton Place Strategies
www.hamiltonplacestrategies.com
202-822-1205
Patrick Sims
Marshall Schraibman

Oct. 2014
Findings:
Cash holdings among
the S&P 500 (ex-fi-
nancials) hit its high-
est level ever ($1.4
trillion) in the fourth
quarter of 2013
However, the S&P
500s median cash-
to-asset ratio, at
5.5 percent, has re-
mained relatively un-
changed over the last
decade
Business investment
hit its post-crisis
peak ($2.7 trillion) in
the second quarter of
2014
I
ts often reported that U.S.
companies are sitting on
piles of cash a la Scrooge
McDuck. Some journalists
point to the amount of cash
U.S. companies have parked
abroad comparing it to the
paltry amount they have
here in the U.S. Others re-
port that companies sim-
ply dont want to invest in
America. But actually looking
at the details of company
cash holdings and U.S. in-
vestment reveals a dierent
picture.

While certain policies (or lack
of them) could be driving
cash holdings higher (or low-
er), HPS analysis indicates
that cash holdings among
the S&P 500 have not in-
creased compared to the
overall size of the compa-
nies. Certain sectors, such as
technology, do hold higher
amounts of cash relative to
their assets, but this gure
has not changed over the
course of the past decade.

Holding higher amounts of
cash is not a trend across
large U.S. companies.

U.S. private domestic invest-
ment has also recovered
signicantly since the cri-
sis, although it has not re-
turned to its pre-crisis peak.
Growth since the recession
has averaged 6.7 percent.
This contributes to our un-
derstanding that companies
are not sitting on funds, but
using them for investment.
That said, investment comes
in many shapes and sizes.
Global mergers and acqui-
sitions (M&A) deal volume
hit a post-crisis high in the
second quarter. Moreover,
U.S. manufacturing technol-
ogy orders are down from
last year, as companies have
opted for whole company
deals, stock buybacks, and
dividends instead of spend-
ing on equipment. This may
be due, in part, to the low
interest rate environment.

A shift in Fed policy and a
change in interest rates will
impact companies invest-
ment decisions. Well see if
that shift comes in the form
of new equipment, smaller
asset deals, and greater over-
all investment growth.
fell nearly 40 percent com-
pared to its crisis-era high.
This is a sign of condence
in the economy the oppo-
site of the ight to safety
seen in the crisis (Fig. 1).

Technology Companies
Are Diferent

Cash and other short-term
instruments are used for
both acquisitions and as a
security tool. Technology
rms hold high levels of
cash in order to invest in
new products and protect
themselves from new rivals.

The S&P 500s technology
sector held a much higher
median cash-to-asset ra-
tio (20.1 percent) as of the
second quarter compared
2 Hamilton Place Strategies
Use The Median Value

Its true that cash held by
the largest U.S. companies
(the S&P 500) has increased
in recent years, reaching
its peak in the fourth quar-
ter of 2013. However, the
median cash-to-asset ra-
tio of the S&P 500 has re-
mained unchanged over
the past decade. This puts
cash levels in to perspec-
tive, comparing it to actu-
al balance sheet growth.
In the second quarter the
median ratio held at 5.5 per-
cent. The ratio also stayed
steady for the largest com-
panies in the index at 4.1
percent. For small compa-
nies within the index (20th
percentile or lower), which
have historically held higher
cash levels, the median ratio
to other sectors within the
index. No surprises there.
The next highest sector
was Consumer, at 10.3 per-
cent, and Communications,
at 10.1 percent. Moreover,
these values have remained
steady over time (Fig. 2).

U.S. Business Invest-
ment Is Growing

U.S. private domestic invest-
ment reached its post-re-
cession high of roughly $2.7
trillion in the second quarter
of 2014. While it has not yet
reached its pre-recession
peak of $2.8 trillion, it has
grown 49 percent since
reaching a bottom in the fall
of 2009 (Fig. 3).
Overall, the data reveals that
Fig 1: S&P 500 Cash And Median Cash-To-Assets
Source: Factset, Bloomberg
Largest firms represent those companies in the 75
th
percentile or higher of the S&P 500 by assets, for the respective period
Smallest firms represent those companies in the 25
th
percentile or lower of the S&P 500 by assets, for the respective period
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
2
0
0
6

2
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5

C
a
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h

A
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d

C
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h

E
q
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a
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t
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2
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$1,410
2
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1
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2
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2
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9

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S&P 500 cash holdings hit its highest
level in Q4'13 at $1,140 billion
but S&P 500 median cash-to-assets
has remained stable if not fallen
0
2
4
6
8
10
12
14
16
18
20
M
e
d
i
a
n

C
a
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h
-
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o
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A
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t
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(
%
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2
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2
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7

2
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0
9

2
0
0
6

2
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5

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0
1
2

-40%
2
0
1
4

2
0
1
3

2
0
1
1

Largest Smallest All
3 Hamilton Place Strategies
Fig. 2: Median Cash-To-Assets By Industry
Source: Bloomberg
Technology has a higher median cash-to-
assets ratio than other sectors
however, technology's median value
has decreased in recent years
0 4 8 12 16 20 24
Median Q2'14 Cash-To-Assets (%)
Utilities 0.9%
Financial 3.0%
Energy 3.8%
Materials 4.2%
20.1%
Industr.
Tech.
Consumer 10.3%
10.1%
6.2%
Comms.
20.1
23.7
21.0
23.6
28.0
19.3
28.0
32.0
28.4
15.0
17.5
20.0
22.5
25.0
27.5
30.0
32.5
Q
2

1
4
Q
2

1
3
Q
2

1
2
Q
2

1
1
Q
2

1
0
23.6
Q
2

0
9
Q
2

0
8
Q
2

0
7
Q
2

0
6
Q
2

0
5
Q
2

0
4
20.8
T
e
c
h
n
o
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o
g
y

S
e
c
t
o
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M
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d
i
a
n

C
a
s
h
-
T
o
-
A
s
s
e
t
s

(
%
)
Fig. 3: U.S. Gross Private Domestic Investment
Source: BEA
U.S. private domestic investment reached
its post-recession high in Q2'14
and quarterly investment growth has
averaged 6.7 percent since the
recession
1,600
1,800
2,000
2,200
2,400
2,600
2,800
G
r
o
s
s

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v
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t
m
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n
t

(
$

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B
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)
+49%
$2,695
2
0
1
4
2
1
0
3
2
0
1
2
2
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1
1
2
0
1
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9
2
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2
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-40
-30
-20
-10
0
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20
30
40
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G
r
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s
s

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s
t
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(
%
)
companies are not sitting on
piles of cash and, contrary to
popular media reports, are
investing in the U.S. econo-
my. Of course, investment
takes on many shapes and
sizes. Companies invest
according to the economic
environment and their fore-
cast of the future.

What About The Fed?

According to a recent report
by The Carlyle Groups Ja-
son Thomas and Kewsong
Lee, business managers
may rationally choose to
wait to invest until the Fed
exits and there is more clar-
ity regarding their natural
cost of capital;
1
a hypoth-
esis espoused by Lorenzo
Bini-Smaghi in an April 2013
paper presented at the Inter-
national Monetary Fund.
2
As Fed policy shifts and
interest rates normalize
along with employment,
output, and consumer de-
mand, U.S. rms may have
an increased willingness to
transact, they state. In their
view, U.S. rms will opt for
new equipment and smaller,
strategic asset deals instead
of the large mergers and
acquisitions that were seen
throughout 2014 (Fig. 4).

Currently, U.S. manufacturing
technology orders are below
2013 levels.
3
And, according
to Morgan Stanley, the aver-
age age of industrial equip-
ment in the U.S. has risen
above 10 years, the highest
since 1938.
4
A shift in Fed
policy may also shift rms
investment decisions. Re-
gardless, U.S. companies are
investing in the economy.
References:


1 Jason Thomas and Kewsong Lee, Higher Rates May Not Be All That
Bad, The Carlyle Group, September 2014

2 Lorenzo Bini-Smaghi, Monetary Policy: Many Targets, Many In-
struments, Where Do We Stand? International Monetary Fund, April
2013
3 USMTO News Release for August Manufacturing Technology Orders,
The Association For Manufacturing Technology, October 13, 2014
4 James R. Hagerty, U.S. Manufacturing Is Rolling On Aged Wheels, The
Wall Street Journal, September 3, 2014
Its debatable if it should or
could be higher, and if policy
is driving that.
Fig. 4: Global M&A
Source: Bloomberg
0
250
500
750
1,000
1,250
2
0
1
0
2
0
1
1
(
$

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n

B
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l
i
o
n
s
)
2
0
0
9
2
0
1
2
2
0
1
3
2
0
1
4
Quarterly deal volume (Q1'09 to Q3'14)
4 Hamilton Place Strategies
Methodology:
Cash = cash and short term investments
U.S. investment = U.S. gross private domestic investment
S&P 500 (ex-nancials) cash holdings sourced to FactSet
Cash-to-assets size and industry breakdown are internal calculations
with data sourced to Bloomberg
U.S. investment data sourced to BEA
Global M&A deal volume sourced to Bloomberg