Corps hoarding cash, not hiring
Feb. 11 (Bloomberg) -- A majority of companies in the Standard & Poor’s 500 stock index increased cash to a combined $1.18 trillion while simultaneously reducing spending, keeping a jobs recovery on hold.
Caterpillar Inc., Eaton Corp., Walgreen Co. and General Electric Co. are among 256 companies that ended last quarter with $518 billion more cash than a year earlier after cutting capital spending by 43 percent. Economists say the dearth of investment is keeping the jobless rate at about 10 percent as the U.S. emerges from its worst recession since the 1930s.
“It’s not clear we are going to see the type of growth following this recession that we’ve seen in previous recessions,” Sandy Cutler, Eaton’s chief executive officer, said in an interview yesterday. That view “is leading people to be cautious as to their rate of reinvestment, and right in parallel with that, in terms of hiring additional employees.”
Investment and hiring may remain low as companies bring unused capacity back on line and rely on productivity gains to fill demand, said Edward Lazear, former economic adviser to President George W. Bush and a professor at Stanford University in Stanford, California. Employers have eliminated 8.4 million jobs since the U.S. slipped into recession in December 2007.
“About three years into the recovery, you start getting significant wage growth,” Lazear said in an interview. “It’s unfortunate because it means workers suffer for a pretty long time after the recovery takes off.”
Based on the latest quarterly reports from S&P 500 companies, the 256 companies increased cash and short-term investments by a combined 78 percent from a year earlier while reducing spending by $30.5 billion to $41.2 billion. For all current S&P 500 members, cash rose about 14 percent to $2.18 trillion, the most on record in nine years of Bloomberg data.
Howard Silverblatt, an S&P senior index analyst in New York, said his analysis as of Sept. 30 showed the cash position of S&P 500 industrial companies reached a record $820.3 billion, up 27 percent from a year earlier. He examined “readily available discretionary liquid assets” excluding financial, utility and transportation companies.
Ways to Reduce Costs
Steps companies took to accumulate cash also included lowering costs, selling shares, raising debt, crimping dividends and putting share repurchases on hold. In February 2009, GE decided to cut its quarterly dividend to 10 cents a share from 31 cents, saving about $9 billion annually. The reduction in the annual payout was the company’s first since 1938.
Eaton’s Cutler, who voluntarily gave up eight weeks of pay in 2009, said in the interview he doesn’t expect his Cleveland- based maker of hydraulics and valves to resume hiring until 2011. Eaton required its 70,000 workers to take furloughs equal to a month of unpaid leave last year. Its cash and short-term investments rose 46 percent from a year earlier to $773 million.
Caterpillar is working to convince S&P and Moody’s Investors Service to lift their negative credit outlooks on the maker of backhoes and bulldozers. The Peoria, Illinois-based company’s cash rose 78 percent to $4.87 billion in a year as it reduced capital spending. Caterpillar has cut more than 36,000 full-time and temporary jobs since December 2008.
“Once we get past this recessionary environment, once we hear from the rating agencies that they’re stable with where we’re going on this, you could expect us to get back into our mode that we’ve been in for many years,” Douglas Oberhelman, chief executive officer elect, said on a Jan. 27 analyst call.
Walgreen plans capital spending of $1.6 billion this year, lower than $1.9 billion last year and $2.2 billion in 2008, as the biggest U.S. drugstore chain slows the number of stores it opens, Chief Financial Officer Wade Miquelon said at a Feb. 8 UBS Global Healthcare Services conference.
Walgreen’s cash more than tripled to $3.15 billion at the end of November from a year earlier. Miquelon said that has bolstered the Deerfield, Illinois-based company’s balance sheet in a strategy that has “suited us very, very well.”
A lack of investment opportunity has caused some companies to accumulate cash, Miquelon said on a call in December.
‘Money in the Bank’
“It’s not great having money in the bank earning almost no interest, but we also want to be very smart and very driven” by return on invested capital, Miquelon said then. “Just because we’re generating cash doesn’t mean that we’re going to feel compelled to do something that doesn’t earn a good, robust return for the company and for the shareholder.”
There is a debate among economists as to when and how the recovery will start. Summers, the White House economic adviser, in December disputed the idea of a “new normal” of slower growth and higher unemployment popularized by Pacific Investment Management Co., the Newport Beach, California-based company that runs the world’s largest bond fund.
Companies may be wary of investing and hiring because of questions about government stimulus, taxes and other federal policies that impact business, Lazear said. Subsidies designed to create jobs “just don’t work” and only drive up deficits that may require higher taxes to control, he said.
“What you need to do is make sure the climate for business continues to be positive, and talking about tax increases is not the right way to do that,” Lazear said.
Some companies are taking initial steps. Cisco Systems Inc. added about 2,100 workers during the quarter ending Jan. 23 from acquisitions and to meet higher demand for networking equipment, CEO John Chambers said in a Feb. 4 interview.
The San Jose, California-based company has increased its cash by $10 billion to $39.6 billion over the past year and may be ready to begin investing if the U.S. government follows the basic tenet of “do no harm,” Chambers said. Cisco may add as many as 3,000 workers over the next several quarters, he said.
“Going forward -- assuming government regulations that favor job creation, economic growth, exports and innovation --we would continue to add, balanced around the world,” he said.
Starting to Hire
Investment in equipment and software rose 13 percent in the fourth quarter and temporary-worker hiring is on the rise, suggesting companies are “on the cusp” of using cash to invest more, said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut.
“Firms are going to be in a position very soon where they’re going to have to hire people,” Stanley said. “We’re starting to see signs that we’re fast approaching that point.”
Stanley predicts the U.S. may post payroll gains of 200,000 to 300,000 a month by yearend. The unemployment rate may end the year at 9 percent and may take until 2013 to reach the levels before the recession.
Executives will keep adding cash to balance sheets this year but at a lower rate than in 2009, said Eli Lustgarten, a senior analyst with Independence, Ohio-based Longbow Securities who covers industrial companies including Caterpillar and Eaton. Companies may begin to buy back stock, boost dividends and make acquisitions rather than accumulate as much cash, he said.
“There will be a time when working capital starts to be re-employed and capital expenditures start to go up,” Lustgarten said. “We’re at the bottom of the cycle, but it won’t reverse that quickly.”
General Electric, the world’s biggest maker of power-plant turbines, medical-imaging equipment and jet engines, had $124.2 billion in cash and equivalents at the end of 2009 including the GE Capital finance arm. Use of cash for regular costs and shoring up GE Capital in the financial crisis left a year-end balance of $8.7 billion at the parent, a January investor presentation showed.
GE’s cash balance should triple to about $25 billion this year, after spending on the dividend, plant and equipment investments and other items, Chief Executive Officer Jeffrey Immelt said during an investor conference call to discuss earnings last month. The figure includes an expected $10 billion in proceeds from selling a majority of NBC Universal and a security unit.
GE, based in Fairfield, Connecticut, had about 23,000 fewer employees at the end of 2009 than it did at the end of 2008, based on data from regulatory filings and press releases. In the past year, GE has announced plans to keep or add more than 13,000 U.S. positions to beef up manufacturing, research and development, based on data from public announcements.
There were some positive signs from the Labor Department, which reported initial applications for state unemployment benefits dropped by 43,000 to a seasonally adjusted 440,000 last week, down from a revised 483,000 in the prior week.GREEAATT!!!!! More than 315,000 households received a foreclosure-related notice in January, RealtyTrac Inc. reported Thursday. That number is down nearly 10 percent from 349,000 in December, which saw the third highest total since the company began tracking AWESOME!!! buy buy buy buy buy buy Wall of worry is GREAT for stocks!!!! BRIC!!!!!!!!!!!!!!!!!!!!!!!
[quote=howboutshoeshine]Extremely negative to post this week's facts!!!!!!!!!!!!!!!!!!!!!!!!!! [/quote]
Roubini loves to party. And I guarantee you he pulls more talent than anyone on this forum. It’s nice being Dr. Doom…
he is the one with those Latvia hotties (?) from Scores
[quote=NYCTrader] I’m sure Roubini has banged many Latvian Scores dancers in his day…
I hated that bearish MF.
I have much more respect for him now.