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Companies sit on huge reserves of cash

Adriene Hill Aug 17, 2011

Companies sit on huge reserves of cash

Adriene Hill Aug 17, 2011

KAI RYSSDAL: There is an unbelievable amount of cash floating around out there. Unbelievable as in, well, into the 13-digit range.

Standard and Poor’s says just the non-financial companies in the S&P 500 — that is to say, not including banks and insurance companies — have socked away more than $1 trillion. A record, should you be curious. And up 12 percent since last year.

Marketplace’s Adriene Hill explains companies have good reasons to stuff their piggy banks whether the economy’s up or down.

ADRIENE HILL: What do companies do with all that cash?

It’s easy to imagine it like some sort of a New Yorker cartoon, where a CEO luxuriates in a room stacked high with thousand dollar bills, just smelling the money. But, corporate cash has good use beyond the sheer pleasure of it.

ROBERT DUVIC: Companies, I think, are fearing the future. If you have cash you can ride through bad times.

Robert Duvic is a professor at the University of Texas at Austin.

DUVIC: In a way companies use cash the way we use cash, to store purchasing power until we need it.

So sort of an emergency fund I have in case my car breaks down?

DUVIC: A big one, yes. But a lot more than a car breaking down.

The last recession was more like the whole road crumbling. Credit markets froze up, and companies didn’t have access to the cash they depended on to make purchases and investments. So they’re holding onto more money now.

There are other reasons for the tight-fistedness. For one, companies might not see any good places to put their cash — no clear investments to make. Also…

ROBERT MITTELSTAEDT: The company that operates conservatively is doing so in the interest of it’s shareholders, certainly, but also in the interest of its employees.

Robert Mittelstaedt is dean of the W. P. Carey School of Business at Arizona State University. Sure, he says, the company might not be hiring right now. But it’s using its money to insure it’ll be able to keep the employees it has if things go bad. Some jobs are better than no jobs. And, Mittelstaedt says, there’s another reason big stacks of cash are good in uncertain markets.

MITTELSTAEDT: Opportunities come up that you didn’t know about.

Maybe it’s a good time to attack your business rival; maybe it’s a good time to swallow them up.

MITTELSTAEDT: So competitors may be going out of business, or competitors may have difficulty. And then the question is do you want to buy that competitor, outright, for a cheap price, at a bargain.

Mittelstaedt says cash-rich companies can take advantage of uncertainty, capitalize on it — for the day, whenever it is, when things are clearly heading up.

I’m Adriene Hill for Marketplace.

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