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S&P: Companies' cash piles are distorted

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Apple’s enviable pile of $40.7 billion in cash and short-term investments might put dollar signs in investors’ eyes. But much of Apple’s mounting cash, along with greenbacks amassed by the other biggest U.S. companies, is a distortion caused by aggressive increases in debt. Companies in aggregate have borrowed money the past three years at four times the rate that cash is increasing, says Standard & Poor’s.

This revelation is significant for investors, as it shows companies aren’t nearly as flush with cash as many assume they are. Much of the cash investors assume companies are accumulating during the period of soaring profit is already spoken for by lenders in the form of issued debt, S&P says.

Corporate America’s cash hoard has become something of legend. Companies are sitting on $1.53 trillion in cash and short-term investments, up 11% from 2012, says S&P based on its universe of 1,700 debt issuers.

But it turns out the cash growth was due to the companies being able to borrow dollars at low interest rates, not necessarily profits, S&P says. Here’s the statistic that tells the story. For every $1 in cash added to companies’ hoards over the past three years, debt has increased by $3.67. This is a complete flip-flop from the situation between 2008 and 2010, when debt grew by just 32 cents for every dollar of cash accumulated, S&P says.

Source: Standard & Poor's

Source: Standard & Poor’s

And don’t think it’s just a statistical error looking at such a large universe. Cash and short-term investments grew $115.2 billion in 2013 among the companies with the largest mounds. But that’s not as impressive once you realize that debt increased by nearly as much, $105.1 billion, during the same time period.

Companies’ rampant borrowing spree is a way to avoid paying domestic tax rates to bring cash back to the U.S. Much of companies’ cash is stashed overseas, and bringing that cash to the U.S. could trigger a tax rate of upwards of 35%. Cash balances rose 14% or $44 billion, based on the top 15 holders of cash that reported how much of their pile is overseas. But of that, $45 billion in cash was generated overseas, which means cash balances in the U.S. fell $1 billion, S&P says.

But while cash is locked overseas, investors in the U.S. are increasingly clamoring for companies to use excess cash in the form of dividends and share buybacks. The answer? Leave the money overseas, but tap the market for low interest rates by borrowing money in the U.S. The borrowed money can then be used to pay the dividend and share buybacks, while leaving the cash overseas.

It might be a smart strategy, but it also might give investors a false impression of companies’ liquidity and trends in financial might. Consider the example of network equipment maker Cisco Systems. The company reported a year-over-year increase of cash of $689 million. That might give investors a good feeling until they realize the company’s debt increased $856 million during the same time period. Cisco’s debt outstanding has grown from $6 billion to $21 billion over the past eight years, as 93% of its cash is now overseas.

At Apple, cash and short-term investments increased $891 million in 2013, but debt during that time exploded by nearly $17 billion, S&P says. Apple keeps 78% of its cash and short-term investments overseas. S&P focused on cash and short-term investments to be consistent with all the companies in its universe. It’s important to note that Apple holds an additional $118 billion in long-term investments.

Below are the companies with the biggest cash holdings, where debt has grown more rapidly than cash:

Company Symbol Cash/S-T invest increase 2013 $M’s Debt increase 2013 $M’s
Cisco Systems CSCO $689 $856
Apple AAPL $891 $16,961
Oracle ORCL $3,279 $3,369
General Motors GM $1,578 $1,920
Ford Motor F $691 $1,427

Source: Standard & Poor’s

You can reach Matt Krantz on Twitter @mattkrantz

 

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