Companies hold on to cash

By Russell Grantham
 and Michael E. Kanell

The Atlanta Journal-Constitution

Last month, UPS executives proudly detailed the profitable quarter that drove the company cash trove above $4 billion. Wall Street’s response? “Show me the money.”

“You’re sitting on a lot of cash,” complained one analyst in a conference call last month with executives, joining a chorus of investors who wanted to know why UPS wasn’t paying them higher dividends or using the money to expand the company.

It’s a question that could be asked of a lot of companies these days.

Economic growth has been anemic overall, yet corporations that cut deeply during the Great Recession are seeing soaring profits. And they’re stuffing mountains of cash into their bank accounts.

But they are not hiring.

Company cash reserves topped $1.84 trillion in the first quarter, up $382 billion from a year earlier, according to the Federal Reserve.

The nation’s businesses are sitting on that cash for a variety reasons, including still-weak customer demand and an uncertain outlook for the global economy. After the recent painful downturn, businesses say they’re also worried about how taxes and regulatory policies could change under President Obama’s administration.

“A lot of companies had near-death experiences in the last year,” said Kurt Kuehn, chief financial officer at Sandy Springs-based UPS. “People are still feeling the shock.”

Most companies probably will remain jittery — and slow to spend or hire — for several more months until there’s a brighter forecast for the economic and business climate, he added.

During most recessions, corporate profits and the stock market rebound earlier than employment.

That’s true this time, too, but the dichotomy is far wider than usual. “There is a record level of cash on balance sheets — something like 15 percent of the market cap,” said Adrian Cronje, chief investment officer and partner at Balentine, an Atlanta-based wealth management firm. “Businesses remain unwilling to invest and expand and hire.”

More than two years after the nation slid into recession, resulting in 8 million jobs lost, only modest growth has returned. Of the three legs of economic demand — consumers, companies and government — only federal government spending has been strong.

And now the effect of last year’s stimulus package is fading.

Meanwhile, consumers — whose spending accounts for more than two-thirds of the economy — remain cautious. Their reluctance is understandable: Unemployment is 9.5 percent nationally, 10 percent in Georgia. Hiring has been anemic at best.

Holding tight

So why are companies sitting on the cash?

Surveys, like one by the National Federation of Independent Business, show lack of customer demand as the top concern, but that’s not where the worries stop.

“Do you have any idea what taxes are going to be next year?” asked Jeffry Netter of the Terry College of Business at the University of Georgia. “Do you have any idea what the economy is going to be next year? Do you have any idea what the government is going to do next year?”

If demand was there, companies might accept the other, lesser risks. But almost nothing is more worrisome than a lack of customers. When economists are debating the chances for another economic downturn, hiring more workers or expanding production looks like a dangerous gamble.

“When you are dealing with finances, what you have to do is predict the future,” he said. “You try to decide what you think is best.”

By putting profits in the bank or into a government bond, a company reaps only a meager return. But it also retains its options, Netter said. “Cash gives you flexibility when the future is uncertain.”

Of course, the future has been especially uncertain for people searching for a job.

Joe Gross, 36, of Alpharetta, started looking last October. “I could see the writing on the wall.”

Married with three children, he was intent on staying in metro Atlanta. He applied for 40 or 50 jobs over the next few months.

“October was horrible. And then the holiday season, things were slowing down even more,” he said. “There were a lot of black holes.”

He focused on networking. A few months into the new year, an old contact helped him land a job as a staffing manager for Recall, a data management company in Norcross.

“I’m making less than I was making two or three years ago,” he said. “But am I making more than in 2009? Yes.”

Now, he is the one doing the hiring. And his company is growing.

Signs of a revival

Is the logjam beginning to ease? In the past six months, there have been signs of improvement in hiring, tentative but real, said Kurt Ronn, CEO and founder of HRworks, an Atlanta-based executive search and staffing firm.

“Companies have come to the conclusion that this is what the future looks like,” he said. “The employer is saying, ‘It may be bad, but I don’t think it will get worse.’ It is no longer about holding on with your fingertips and just trying to survive.”

There have been job gains in three of the past four months, but it will take a long time to dig out of the hole — even with steady improvement.

Georgia had 90,000 fewer jobs in June than it had in June of last year, according to the U.S. Bureau of Labor Statistics. The state has 357,888 fewer jobs than it had before the recession started in 2007.

Lost ground can’t be made up unless companies hire.

The hoarding can’t go on forever — if only because shareholders do get antsy.

In the 1980s, many of the older, established consumer companies piled up cash — not because of a shaky economy, but because management was risk-averse and enjoyed the flexibility the money provided.

Many investors disapproved, since they would have preferred to get the money in dividends. So the strategy left many of those companies under-valued in the market and vulnerable to takeover.

The result was a slew of leveraged buyouts.

This time, while demand may have weakened badly during the steep recession, many companies slashed costs aggressively enough to stay very profitable.

Saving, spending

A sampling of five major Georgia companies showed their cash and short-term investments have jumped 20 percent since the end of 2009, to $19.8 billion. It’s up almost 90 percent from 2007.

UPS is feeling uncertainties over what to do next with its cash.

In the depth of the recession, the global package shipper shed jobs, dropping from 425,000 in 2008 to 408,000 now — mostly through attrition.

But UPS also spent billions of dollars on expanded airport hubs, technology and newer aircraft that allowed it to cut costs and concentrate its air and ground operations into fewer, more efficient hubs, particularly in the United States.

Meanwhile, UPS built new hubs in China and Canada, and continued buying small companies or setting up joint ventures in emerging markets such as Slovenia, Turkey, Vietnam, Malaysia and Indonesia.

Even with the lackluster recovery in the United States, the moves have paid off. UPS’ revenues rose almost 13 percent in the first half of this year, much of it from rapid growth overseas. Net income jumped 63 percent compared to last year, to almost $1.4 billion.

The company’s cash and short-term investments soared to more than $4 billion by the end of June, from $2.1 billion six months earlier.

Kuehn, UPS’s finance chief, said the company would normally be paying out much of that cash to investors. But, after Standard & Poors warned that it could downgrade its rating on UPS’ debt, the company stopped buying its shares, he said.

Meanwhile, package shipments by UPS’ customers in the United States only grew 1 percent last quarter and are still about 5 percent lower than they were back in 2007.

Kuehn said UPS will keep buying operations to expand overseas, where growth is stronger. But UPS probably won’t do much hiring in the U.S. until it recovers lost ground here. Recent signs of economic weakness point to a “painfully slow” recovery, he said.

Another worry, Kuehn said, is it’s possible that tax rates could rise or a tax break on dividends could expire next year. It’s also unclear how regulations regarding health care and carbon emissions could change and affect the company’s costs.

“Any one of these wouldn’t cause any hesitation. In aggregate, it seems like a lot of uncertainty,” he said. And in the face of such uncertainty, he added, “you delay big decisions.”