Since this blog routinely traffics in bad news, I thought I ought to pass along a positive tidbit: a lot of US companies have considerable cash on hand, so they should not be too badly affected by the credit crunch.
However, the fact that they are so well endowed is curious. It is partly because large companies have embraced the religion of cost-cutting almost to excess. The expansion just past featured a record proportion of GDP growth going to corporate profits, and a record low to worker wages. In addition, the high levels of cash also indicate a reluctance in the past cycle to invest (we’ve heard this on all fronts, anecdotally, from various advisors to companies).
From the Financial Times:
Corporate America waded into the darkest days of the credit crisis with more cash than ever before, a sign many of the US’s biggest companies have been bracing for signs that Wall Street’s problems will infiltrate the rest of the economy.
Excluding utilities and financial institutions, members of the Standard & Poor’s 500 Index ended June with a record $648bn in cash and short-term securities.
“Corporate profits until the last six months were pretty good,” said Fred Smith, chief executive of FedEx, the package delivery group. “With the exceptions of the autos and housing, there’s a lot of cash flow and a lot of capability in the industrial sector outside of the funds provided by financials.”
Many large US companies began to stockpile more cash in the aftermath of the last economic downturn, earlier this decade. The size of S&P 500 members’ war chest reached a plateau in 2005 as conditions improved but never slipped below $600bn. And in the past year, their liquidity has inched higher.
They may need it. Even if big companies have plenty of cash to weather the slowdown, many of their customers, be they consumers or smaller business, may not.
While some of Wall Street’s most venerable names collapsed and lawmakers debated the White House’s proposed $700bn bailout, corporate finance chiefs have closely monitored the credit markets for any effects on their funding plans.
“We will see the total amount of credit will be reduced a little bit,” said Rick Fearon, chief financial officer of Eaton, an industrial conglomerate. “There is an amount of leverage that needs to be reduced. It’s a logical concern and one we’re watching carefully.”
Some have more to worry about than others.
The crisis “will create a real winner takes all environment,” said Jason Trennert, chief investment strategist at Strategas Research Partners. “Well-run companies not dependent upon credit markets will take market share from companies which aren’t well run and are [dependent on credit].”.
Some readers may have seen the Bloomberg story, “McDonald’s Says Bank of America Won’t Boost Loans ,” and have read it as a sign that banks were cutting off credit to large, healthy companies. However, as the article makes clear, the borrowers that are having trouble getting credit are McDonald’s franchisees:
McDonald’s Corp., the world’s largest restaurant company, told some U.S. franchisees to seek other ways to finance store improvements after Bank of America Corp. declined to increase lending.
Store owners have exhausted financing used to pay for upgrades and equipment to make lattes and espressos, and Bank of America won’t provide more money as it works on the planned purchase of Merrill Lynch & Co., McDonald’s said in a memo that was obtained by Bloomberg News.
Now admittedly, medium to small businesses having trouble getting access to credit is not good for the economy, particularly for employment, since small businesses have been the engine of job growth. But the flip side is that small businesses are among the first to find loans more difficult to obtain in business downturns.