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Americans have steadily spent their pandemic savings since 2022. US companies are taking a different approach.
Non-financial corporations have $6.9tn in liquid securities and cash, constituting about 12 per cent of their assets, according to Barclays. That’s close to the pre-Covid trend (shown in the left-hand chart below). But the picture changes substantially when the strategists exclude securities and focus only on cash, as shown on the right:
Barclays extrapolates the trend in corporate cash from before Covid, and comes up with an estimate that companies are holding $800bn in “excess” cash:
Now, Barclays doesn’t mention what share of companies’ liquid securities are held in corporate bonds these days. It’s possible that given the steep losses in duration over the past couple of years, companies have been holding cash instead of corporate bonds.
Still, their relative surplus of cash is weird for two reasons.
First, most of the “excess” savings is being kept in checking-account deposits at banks, says Barclays. This means companies aren’t earning the substantial yield they could be earning in money-market funds. Second, companies have also been ratcheting up their short-term borrowing — and paying high short-term rates despite their cash hoards. On aggregate, companies have taken on an additional $600bn in short-term debt since early 2022, the bank found:
So how do they explain this trend? From Barclays with our emphasis:
This is a bit puzzling. After all, non-financial firms have left most of their accumulated cash in the lowest yielding alternative — checking deposits — rather than higher-yielding money funds, which also have same-day liquidity (Figure 6 [above]). Even assuming the firms wished to maintain their overall cash buffers, they could still have shifted more of their immediately available liquidity into Treasuries or securities rather than a bank checking account. Moreover, it seems likely that companies might be able to find capital investments that are higher yielding than either cash or securities. One possible explanation is that because we are looking at aggregate totals for borrowing and cash holdings, we may be missing differences across firms. The borrowing is coming from different companies than those accumulating more cash.
In other words, it’s very possible the companies that need cash don’t have it, and the companies that have cash don’t need it.
Still, investors shouldn’t get too optimistic about the prospect of dividends or buybacks with all that “excess” cash, the bank warns.
That said, we suspect some of the stickiness of COVID cash is related to expectations of slower future growth and increasing management caution. As a result, it makes sense to maintain thicker precautionary cash buffers. Likewise, if firms expected the economy to slow and interest rates to decline, they might not want to lock in higher borrowing costs by taking out longer-term loans . . . Firms have reduced their share buybacks (down 11%y/y in Q2) while also increasing their cash cushions. The biggest cash increases have been at firms with exposures to US consumers.
If firms have become more cautious, they may not wish to spend down their cash balances and return their cash asset ratios to pre-Covid levels. As a result, it is somewhat unclear how much corporate “firepower” the roughly $800bn in surplus savings actually reflects. While we expect still-large and lingering cash buffers will continue to cushion corporate balance sheets from the Fed’s “higher for longer” policy, it is unclear how much padding is really there.
Another way to look at this is that companies are acting like Pepsi on a broad scale, hanging on to cash and doing short-term borrowing in anticipation of an economic slowdown.
Further reading:
— Is Pepsi punting on interest rates falling?
