In contrast to the current slowdown in earnings, there is oddly a massive ramp-up in corporate cash stockpiles. It may seem counterintuitive, but it’s clear when you examine the numbers.
So why are these stocks — mostly in the tech sector — hoarding cash? Some folks will contend it’s just corporate greed. Others claim its uncertainty. More circumspect observers claim it’s probably a little of both, adding the fact that there aren’t many attractive options out there.
But however you slice it, these companies are just getting richer. And there’s almost ZERO chance of them spending that cash anytime soon.
Foreign Cash by the Numbers
Just how much cash do corporations have?
For starters, Reuters quotes the federal Bureau of Economic Analysis figures that show real pretax profits at U.S. corporations have soared from less than $1.5 trillion in 2009 to $1.9 trillion in 2010 and almost $2 trillion in 2011. Some recession, right?
And how much is overseas? Well here’s a quick rundown of some of the biggest foreign cash stockpiles, with numbers from a September Senate subcommittee meeting:
- Apple (NASDAQ:AAPL) –67% ($74 billion overseas, $110 billion total)
- Microsoft (NASDAQ:MSFT) — 89% ($50 billion overseas, $59.5 billion total)
- Cisco (NASDAQ:CSCO) — 89% ($42 billion overseas, $47 billion total)
- Oracle (NASDAQ:ORCL) — 84% ($25 billion overseas, $30 billion total)
- Google (NASDAQ:GOOG) — 48% ($26 billion overseas, $49 billion total)
- Qualcomm (NASDAQ:QCOM) — 62% ($17 billion overseas, $27 billion total)
‘Uncertainty’ Is No Excuse
The billion-dollar question — or in the case of Apple, the $74 billion question — is what to do with foreign cash. The options, simply put, are:
- spend a chunk of the foreign cash and pay the penalty, a 35% rate; or
- keep hoarding the cash until a great opportunity, great crisis or a change to the tax code comes along.
And the reality is that there are no major crises pushing corporations to operating losses like some blue-chips saw in 2009, and there are few major opportunities presenting themselves that would justify the 35% tax hit on any expenditures.
So the hoarding continues.
Some critics contend that uncertainty is holding back capital expenditures, as the lack of CEO optimism has indicated lately. But consider that some of the biggest deals of the past few years were made by gutsy corporations in the depths of the crisis because valuations were cheap.
For instance, in January 2009, Pfizer (NYSE:PFE) announced a megamerger with Wyeth for $68 billion. Soon after, in March 2009, rival Merck (NYSE:MRK) snapped up Schering-Plough for $41 billion. The move was meant to tap into the drug pipelines of these respective companies and offset revenue set to disappear from patent expirations.
So let’s not act like a little uncertainty shuts off all spending.
Real Reasons Holding Companies Back
So if the bogeyman of uncertainty isn’t a viable excuse, what are the real reasons?
Here are a few practical reasons that tech stocks won’t spend their cash anytime soon:
Tax penalties make burden higher: Can you imagine losing a third of all the money you withdraw from the ATM via fees? That’s what the 35% repatriation tax entails. So you can be sure that if a corporation is going to endure that hefty haircut, it either has a deal that is too good to pass up, or it’s in awfully dire straits. If neither of those things are true … well, why stop at the ATM at all?
The best deals are done. The aforementioned big pharma buyouts were game-changers for the industry. But with those moves made, what other big strategic buys would make sense in 2012? There may be a few smaller deals, but the chance that a megamerger or other major opportunity that hasn’t been acted on seems unrealistic. Furthermore, a prime use of foreign cash is to buy foreign businesses — take Microsoft and its $8 billion purchase of Skype, which was headquartered in Luxembourg and thus not subject to the corporate tax. The tax-haven status of these companies has made them quite attractive, so those deals have been quickly done … what else is Microsoft going to use the money for? But these blockbuster deals have become rare as viable targets are snatched up.
Tax holiday hopes: Even if you can get past the 35% haircut, and even if you find a deal that you really want to make, many major corporations continue to hold out hope for a “tax holiday” that will allow them to make a move without penalty. Consider that way back in March, when Apple announced its dividend and buyback plans, the corporation’s CFO said its refusal to tap foreign reserves was wholly due to taxes. So it stands to reason that a tax break could spur investment immediately, right? Corporate America has had lobbyists working around the clock on this idea, and you can be sure it will come up again in 2013 amid discussions about how to further stimulate the economy.
If we agree these are the main reasons tech stocks aren’t spending, then the sad reality is that there’s little hope of anything changing.
Amid the current focus on deficits, it remains highly unlikely that the tax burden is going away. Critics of a tax holiday contend that kind of shell game simply rewards companies for doing something they should do anyway — use their profits to invest in their own businesses — and comes at a huge cost of tax revenue. Consider that total corporate tax revenue in 2011 was $181 billion, according to the Heritage Foundation. If Apple were to avoid paying taxes on its foreign cash, it would result in $25.9 billion in lost tax revenue — or roughly 14% of the U.S. corporate tax revenue from an entire year!
In fact some may be taking the opposite angle — that foreign cash should be subject to a tax whether companies use it or not, in order to bolster Treasury tax revenue.
And as far as investment opportunities go? Well, unless some tiny start-up comes out of nowhere, we have seen just about all that Silicon Valley has to offer. And frankly, Groupon (NASDAQ:GRPN) and Facebook (NASDAQ:FB) are nothing to brag about.
Blue-chips could, of course, reward shareholders with a plump special dividends or big buybacks, of course … but forgive me if I don’t hold my breath on a corporation willingly taking a 35% tax hit on foreign cash only to give it away.
So the result is more stockpiling, less spending, and an ever-growing hoard of money that may never get put to use.
- As I have said before, cash stockpiles are meaningless numbers if you can’t use the money on something smart. (The Slant)
- Moody’s says 22 U.S. tech stocks have roughly $289 billion in cash overseas now, and that number will jump to $400 billion by 2015. (AP)
- Record profit margins beget record cash flows. (Business Insider)
- A great look at the tax games multinationals play. (Dealbook via New York Times)
- Europe is also looking at getting its due from American corporations who are tax scofflaws. (CNBC)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple but none of the other stocks named here.