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A year ago, when the economy was going to hell in a hand basket, the mantra was "cash is king."
Now some investors are eager for a regime change.
Companies are sitting on a hoard of cash that hasn't been this big in 60 years, according Federated Investors senior vice president Linda Duessel, citing data from JPMorgan Chase. Excluding PNC Financial Services Group, the 10 largest companies in the Post-Gazette's Top 50 were holding about $4.6 billion in cash at the end of their most recent fiscal year, up 19 percent from year-ago levels.
With the economy on the mend and all that cash earning next to nothing thanks to record low interest rates, there are increasing calls for companies to put the stash to work. American Eagle Outfitters CEO James V. O'Donnell fielded one of those calls last week during the South Side teen clothier's earnings call.
"You're building quite a hoard of cash," Lazard Capital Markets' Todd Slater told Mr. O'Donnell, noting that the stockpile could approach $1 billion by the end of the year.
"I'm confused as to why not deploy that much more aggressively, since it does nothing for shareholders sitting on the balance sheet," Mr. Slater said.
"Right now, coming out of a bleak 18 months, we prefer to have a very strong cash position ... we're in a good place and our plans are to stay in a good place," Mr. O'Donnell, adding that American Eagle is looking at a number of possibilities for using its cash.
For cash-endowed com- panies, the issues are how much to spend, how fast to spend it and what to spend it on. The shopping list includes expanding their business, acquisitions, buying back stock and dividends.
"If they're bullish about their companies, they're probably going to spend money," Ms. Duessel said.
She believes there's reason to be optimistic. Corporate revenue and earnings are better than expected. Companies are hiring more temporary workers, usually a precursor to them putting workers permanently on their payrolls. Business spending should register back-to-back quarters of double-digit growth when first quarter numbers are released and merger activity is up 46 percent from year-ago levels.
PDF"What we're seeing is evidence of a V-shaped recovery," Mr. Duessel says. "What I do know about cash is that it earns nothing and you can only go so long earning nothing. Your shareholders are going to want you to put that cash to work."
Federated did just that on Jan. 28, announcing a one-time dividend of $1.26 per share. Yet JPMorgan analyst Kenneth B. Worthington was mildly disappointed with the spending. In a note to investors, Mr. Worthington wrote that while he generally likes the idea of distributing cash to shareholders, given the number of investors cashing out of the Downtown investment manager's money funds and the uncertain regulatory environment, "we would prefer to see more capital held at the company."
There's considerable evidence that companies can be just as stupid as many consumers when it comes to spending wisely. Their track record notwithstanding, fear that the economic recovery could falter is another reason some investment managers don't want all that cash burning a hole in corporate pockets.
"There is nothing wrong with companies having cash on their balance sheets because, in all likelihood, we re-enter a recession in two years," said Louis Stanasolovich of Legend Financial Advisors in McCandless.
Bruce Miller, chief investment officer of Cookson, Peirce & Co., Downtown, believes conditions have to stabilize a little more before spending begins in earnest.
"The economic environment is still a little bit shaky and Washington is a little bit dicey. When that firms up, I think you're going to see a lot of activity," Mr. Miller said.
Many companies that are parting with their cash have lowered their expectations of what those investments are going to earn. Colin Symons, chief investment officer of Symons Capital Management in Mt. Lebanon, said that's "a side effect of the zero interest rate policy our government has going here."
Since he's not betting on much of a recovery, Mr. Symons is content to have companies preserve cash.
"But I think I'm in a minority," he admitted. "I think most people are impatient."
Chris Wiles of Rockhaven Asset Management in Mt. Lebanon says companies aren't as likely to invest their cash into operations if they are expecting slow economic growth. He likes using cash for stock buy backs, but one year into a recovery that's lifted the S&P 500 nearly 70 percent, many companies won't find their shares at bargain prices.
"My favorite use of cash is for companies to make aggressive share repurchases ... in a severe bear market. Of course, that's when fear and uncertainty are at the highest and most companies are reluctant to part with their safety net," Mr. Wiles said.
Next on his shopping list is dividends. But committing to pay a prescribed amount to shareholders each quarter requires a depth of confidence many companies don't have yet.
"They'll want to feel more comfortable about the ongoing recovery before they raise dividends," Ms. Duessel says.
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