Flush with cash
Cash reserves at Georgia’s 15 largest public companies grew more than 70 percent over the last five years as firms reaped profits from running lean and holding off on hiring.
Year….. Total Cash Reserves
2Q 2012….. $41.7 billion
2Q 2011….. $36.4 billion
2Q 2010….. $31.1 billion
2Q 2009….. $27.2 billion
2Q 2008….. $20.7 billion
2Q 2007….. $24.2 billion
Source: Bloomberg, staff research
Cash Reserves at Georgia’s Largest Firms
Georgia’s Fortune 500 companies hold a total of nearly $42 billion in cash, short-term investments and other reserves. Here’s a breakdown:
Company……. Cash Total 2Q 2012…….Percentage Change Since 2007
Home Depot….. $2.8 billion….. (-7%)
UPS….. $7.3 billion….. 245%
Coca-Cola….. $17.0 billion….. 147%
Delta Air Lines….. $3.5 billion….. 3.5%
Aflac….. $2.1 billion….. 52%
Southern Co…… $659 million….. 290%
Genuine Parts….. $172 million….. (-38%)
First Data….. $483 million….. (-48%)
SunTrust Banks….. $5.8 billion….. 36%
AGCO….. $393 million….. 71%
Coca-Cola Enterprises….. $422 million….. 138%
Newell Rubbermaid….. $371 million….. 128%
Mohawk Industries….. $319 million….. 453%
NCR Corp…… $377 million….. (-67%)
Rock-Tenn….. $35 million….. 201%
Source: Bloomberg, staff research
Georgia’s largest public companies have been piling up a mountain of cash – nearly $42 billion at latest count – as the firms reap the benefits of previous cost-cutting and a growing global economy.
The big companies also have opened the taps somewhat, spending more on investments in their businesses, acquisitions and payments to their investors.
But so far, such spending hasn’t translated into job growth, at least for Georgia’s 15 largest public companies on the Fortune 500 list, which ranks them by revenues. Those firms, ranging from giant retailer Home Depot to packaging manufacturer Rock-Tenn, employed 1.2 million people at the end of last year. That was 8,700 fewer people than at year-end 2007 — the start of the Great Recession — even though several have acquired other companies during that time.
Since mid-2007, the 15 companies have increased their stockpiles of cash, short-term investments and other reserves to $41.7 billion from $24.2 billion.
Coca-Cola is the standout, with cash and reserves of almost $17 billion at the end of June — a third of its annual sales. The Atlanta beverage giant says it plans to use its cash stockpile, as well as money borrowed at historically low rates, to fuel ambitious growth plans here and overseas, as well as big payouts to shareholders.
The company says it has bought $1.6 billion of its stock so far this year and invested $10 billion over the past three years in its U.S. operations, with plans for more than $30 billion in global investments over the next five years.
But some experts say that, in general, companies big and small are likely to continue saving money for a rainy day, rather than investing it in expansions or paying it to shareholders because they face uncertainty in so many quarters.
“Corporations want a margin of safety to deal with potentially bad outcomes,” said Adrian Cronje, chief investment officer at Atlanta investment advisory firm Balentine LLC.
Nationally, cash reserves now equal 5 percent of corporations’ assets — their highest level since 1961, he said. The typical level is about 3.8 percent.
Others say companies are sitting on more cash because economic demand is weak and they don’t see enough profitable projects to invest in.
“They’re building up the cash because they don’t need it for investment,” said Dean Baker, an economist and co-director of the Center for Economic Policy Research in Washington, D.C. Companies could spend more money on acquisitions or bigger dividends, but most likely “they’ll keep sitting on it,” he said, until customer demand for their products gets considerably stronger.
Either way, the situation translates into a continued weak job market, with Georgia’s unemployment rate at a relatively high 9.3 percent. Nationally, the U.S. economy added just 96,000 jobs in August, well below the 125,000 level economists had been predicting, and down from 141,000 in July. Unemployment fell at the same time to 8.1 percent from 8.3 percent in July, but economists said that was due largely to people giving up the job hunt.
About 395,000 people left the job market, more than offsetting last month’s weak job growth, said Don Sabbarese, director of the Econometric Center at Kennesaw State University’s Coles College of Business. Even though the U.S. economy has been recovering since 2009, employers still aren’t adding enough new jobs to keep pace with the number of new people entering the job market, he said.
“We’ve got 125,000 new people coming into the job market every month,” he said. “It’s a tough situation.”
And like the gloomy jobs picture, companies are also seeing slower profit growth and greater uncertainty here and abroad, he said, so they’re pulling in their horns.
“These corporations are just trying to figure it out,” said Sabbarese. “It seems like you have one or two decent quarters and then something comes along and zaps the domestic economy.”
He said the crash of financial and real estate markets and the global recession of 2007-2009 caused “a huge disruption in 2008 and 2009.” That’s been followed by years of slow recovery and economic and political uncertainty.
Many companies seem to have developed a bunker mentality in which any bright spots here or overseas are quickly overshadowed by worries elsewhere.
“It’s not going to change until it’s clear that the economy is working close to its full potential,” said investment adviser Cronje.
The U.S. economy grew at a slack 1.7 percent annual rate in the April-June quarter, the Commerce Department said last month. Economists expect more slow growth in the second half of the year.
Cronje said companies big and small are worried about the outcome of the U.S. presidential election in November. They also worry about whether Congress will be able to avoid political gridlock that could lead to federal budget cuts and tax increases that could trip up already weak economic growth.
The U.S. economy grew at a slack 1.7 percent annual rate in the April-June quarter, the Commerce Department said last month. Economists expect more slow growth in the second half of the year.
Likewise, he said, parliamentary elections next year in Germany could send shock waves through the European Union, already struggling with recession. If voters angered over bailouts of Greece and other nations boot out their national leaders, that could have a big impact on the global economy, he said.
Baker doesn’t buy the argument that corporations, which are in the business of taking calculated risks, are stymied by such worries. “I don’t think that’s the reason, because they’ve been sitting on the cash for a while,” he said.
Putting a portion of that cash to work would boost the economy considerably, Baker said. With corporate cash reserves at a historic high, investing even a 10 percent portion of those reserves would push up total capital spending by 20 percent. That could boost the nation’s economic growth by 2.5 percentage points and add 2.5 million jobs, he said.
“That would be a big deal,” he said. But companies aren’t going to up their bets without clear evidence that stronger growth is coming, he added. “I understand why they’re not investing,” he said.
Still, some companies aren’t waiting.
This Wednesday, Monroe, Ohio-based KLW Plastics is opening a new plastic container plant in Fairburn, its third since the privately-held company was launched eight years ago. The plant, expected to employ about 25 by year-end, will make plastic containers for hazardous liquids, better known as jerry cans.
KLW Plastics president Mike Legeza said the 70-employee company basically had no choice about making the $3 million investment because he’s turning customers away.
“We are at 100 percent capacity and have been since January,” he said.
Still, he said he’ll wait before investing another $3 million in the Fairburn plant that would double its capacity, even though his company’s board has already authorized it.
“That machine I’m holding off on, probably until after the election,” he said.
