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Companies Plan to Use Cash Stockpiles

Businesses are drawing down their cash.

21Mar

Is this the quarter that U.S. companies finally break open their piggy banks?

For only the second time in more than two years, the corporate-cash indicator from the Association for Financial Professionals shows that more finance executives (28%) anticipate cutting their cash hoards in the first quarter than are planning to add to them (23%). The last time finance professionals forecasted lower cash and cash equivalents for a quarter was in January 2011, when the AFP began conducting the quarterly survey. If the forecast is correct, it would suggest companies are becoming less wary of parting with their cash.

A forecast, of course, is just a forecast. Quarter-over-quarter and yearly, corporate-cash balances are still climbing. Forty-seven percent of organizations answering the survey said they had larger year-end cash balances in 2012 than in 2011, versus 27% that reported smaller balances. And from the third quarter of 2012 to the fourth, 37% of respondents increased balance-sheet cash, compared with 32% that reduced their reserves.

More important for the U.S. economy (and corporate earnings) is what companies are doing with their cash. Although some are spending it on acquisitions, more are using it to pay down debt, buy back shares, and issue dividends, according to Jim Kaitz, the AFP’s president and CEO. Although that suggests companies aren’t reinvesting in their businesses much, those activities are still better than keeping money in low- return cash-investment vehicles.

Finance professionals told the AFP they are neither “more aggressive nor more conservative” with investment selection in the current quarter. That’s a change from last October, when the difference between the net percentage becoming more aggressive and those becoming less aggressive was plus 5%.

“Some finance pros commented that they were now focusing exclusively on U.S. Treasury money-market funds and overnight deposits,” according to the AFP, a decidedly conservative stance. Others may be seeking more yield than those investments can earn, moving unneeded cash to longer-term reserves or moving international cash “further out on the curve,” says the AFP.

Meanwhile, it appears that large companies, at least, have no impediments to adding to their liquidity positions through the debt markets. High-yield bond issuance reached $307 billion in 2012, up 39% from 2011, according to Fitch Ratings. Leveraged loan issuance increased 17%, to $664 billion.

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