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|  | JULY 8, 2004
By William C. Symonds Corporate America: Stuffed with Dough Even though profits are up, battle-scarred companies keep loading up on cash. Will their caution hurt the economy? Blessed with a lock on its markets, Microsoft (MSFT ) is one of the greatest cash machines ever created. At the end of March, it had $56.4 billion of cash on its books. And that figure could swell to nearly $60 billion when it reports its fiscal fourth-quarter earnings on July 22. That may be too much for even Microsoft's conservative chairman, William H. Gates III. With its long-running antitrust troubles finally winding down, Microsoft is expected to announce by the end of July a share buyback that some suspect could be as high as $40 billion. When it comes to its corporate piggy bank, Microsoft is in a league of its own. But many other companies, flush with soaring profits, are also facing an embarrassment of riches. At the end of the first quarter, the 374 industrial companies in the Standard & Poor's 500-stock index collectively were sitting on $555.6 billion of cash and short-term investments. That's up some $56 billion, or 11%, since the end of 2003, and more than double what they had at the end of 1999. PUNY RETURNS. This growing money pile could spell either opportunity or trouble for the economy and investors, depending on what companies decide to do. With the rise in consumer spending slowing, the economy needs companies to start tossing some of those big bucks around to keep momentum from flagging. That could happen as CEOs' moods brighten. The Conference Board reported July 7 that more than 90% of chief executives in its latest quarterly poll say the economy has improved. If the corporate dollars start flowing, "there is yet another shoe to drop in the expansion," Federal Reserve Chairman Alan Greenspan recently told the Senate Banking Committee. But, so far at least, instead of putting all this firepower to work -- by pumping up capital budgets, upping the pace of hiring, restocking inventories, or passing out bigger dividends -- companies are keeping much of their powder dry. Rather than taking a risk, many would rather park their cash in the equivalent of money-market funds -- never mind that they're often earning a puny 1% return. KNOCKED FOR A LOOP. The mood is one of "continued caution and disciplined spending in the business sector," concluded a number of members of the Fed's policymaking Open Market Committee at its May 4 meeting. "That caution," adds Sung Won Sohn, Wells Fargo & Co.'s (WFC ) chief economist, "is holding back economic growth." Why aren't companies spending more? Blame it on the series of events that knocked them for a loop over the past few years: recession, terrorist attacks, financial scandals. After getting pummeled, companies slashed expenditures and set out to boost their reserves. Now, with the economy rebounding, this budgetary discipline is generating a huge surge in earnings. Collective earnings for the S&P 500 reached a record annual pace of $481.7 billion in the first quarter, and equity analysts predict the record will be smashed as second-quarter earnings are reported in the coming weeks. So far, though, companies have been unusually tightfisted with their new-won wealth. Take capital spending. To be sure, it is rising. But since the start of 2003, it has lagged far behind surging cash flows, something that hasn't happened since the mid-'70s. Similarly, companies aren't restocking their shelves anywhere near fast enough to keep pace with sales. That drove the ratio of inventories to sales to a record low of 1.3 in April. MIDAS TOUCHES. And after a hiring binge in early spring, employers pulled back and added just 112,000 jobs in June, less than half the 250,000 that had been projected. Despite the tech recovery, Cisco Systems (CSCO ) hired all of 200 employees last quarter -- hardly enough to register on the radar screen of a giant that employs 34,000. BellSouth (BLS ), which slashed 17,000 jobs over the past three years, has cut 2,200 more this year. All this has produced mountains of cash. In fact, 24 of the 374 industrials in the S&P 500 have at least $5 billion on hand. Many are tech companies, such as Hewlett-Packard (HPQ ), Intel (INTC ), Cisco Systems (CSCO ), IBM (IBM ), and Oracle (ORCL ). But other industries have lots of dough, too. High oil and gas prices have pushed Exxon Mobil (XOM ) cash reserves to $15.9 billion, second only to Microsoft. Health-care insurers and big drugmakers also have the Midas touch. While many execs argue they need the money in case the economy softens or for strategic moves such as acquisitions, the problem with sitting on so much cash is that it drags down a company's return on capital. Anthony J. Carfang, partner at Treasury Strategies, which advises businesses on cash management, says he has seen "a huge swing of corporate assets into money-market mutual funds," yielding less than 1%.
BW MALL
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