Source: University of Illinois
According to a recent Moody’s Investors Services report, U.S. corporate companies are sitting on a record high $1.24 trillion of cash. The Wall Street Journal reports cash and near cash holdings by U.S. nonfinancial firms increased from 9% of GDP in 2003 to 13.9% in 2011. Analysts suggest these increased holdings are partially a reaction to the financial crisis. Some companies are repairing their balance sheets. Although capital investments by corporations are increasing moderately, many companies have been cautious due to the economic outlook and regulatory uncertainty.
Due to limited investment opportunities, many companies are simply increasing stock buybacks and dividends to enhance shareholder returns. For example, Apple announced in March they will start paying dividends for the first time since 1995 and also initiate a $10 billion stock buyback next year. The lack of capital investment of this cash does push against stronger economic activity and growth.
Corporations, lending institutions and farms have all increased cash holdings the past five years. In times of economic uncertainty, firms often move to safety and higher cash holdings. On the corporate side, these increased cash holdings can be a headwind for economic growth. In agriculture, the increased liquidity provides a reserve for increased price and production risks. The tradeoff is decreased profitability due to the low interest earned on cash and savings. Lenders are also affected through higher loan repayments and lower demand for loans.