Buildup of Cash Isn’t Swaying Hiring
Corporate America must believe it: You can’t be too thin or too rich.
The economy created a net 112,000 jobs in January, well below expectations, the government said Friday. It was another in a string of disappointing payroll reports that have pointed up companies’ reluctance to hire, even as business conditions have improved markedly in the last year.
The disconnect here, or at least one of them, is that jobs are in short supply even though the financial wherewithal to create them isn’t. That’s clear from the dramatic turnaround in corporate earnings last year that has left many companies awash in cash.
How much cash? The numbers are stunning on first glance.
Computer chip titan Intel Corp. ended last year with $13.5 billion in cash on its balance sheet, up from about $8 billion two years earlier. Telecom giant SBC Communications Inc. had $4.8 billion in cash at year’s end, compared with $703 million at the end of 2001. Boeing Co. finished the year with a cash hoard of $4.6 billion, compared with $633 million two years ago.
A company’s checkbook balance is just one factor in any decision about hiring, or spending in general. But it’s certainly a crucial factor.
“The numbers have been extraordinary,” said Richard Rippe, chief economist at Prudential Equity Group in New York, referring to the amount of cash U.S. companies overall have generated in the last year. “Now the question is: What do they do with it?”
Potential job seekers aren’t the only ones who might be echoing Rippe’s query. Shareholders should be keenly interested in how corporate cash will be spent; it’s their money, after all.
Investors know from their own experience that cash is a lousy asset now, as short-term interest rates hold at 40-year lows. A chimpanzee might be able to figure out how to earn as much on cash as most corporate treasurers are earning at the bank or wherever they are stashing capital for the time being.
As the money piles up, while jobs don’t, many economists increasingly are asking whether there’s something about this recovery that is substantially different from past ones: Are companies more cautious about taking risks than they’ve ever been before?
Given the relentless pace of globalization, it may be that many executives have greater competitive concerns than has been true at this stage of previous recoveries. And that may be translating into a stronger reluctance to spend, or at least a sharper focus on spending as little as possible.
Stephen Roach, economist at Morgan Stanley & Co. in New York, was at the annual meeting of the World Economic Forum in Davos, Switzerland, last month. It’s a gathering of some of the biggest names from the corporate, academic and government sectors worldwide. One of the hottest topics, Roach said, was “offshoring” -- the continuing shift of manufacturing jobs to low-cost producers such as China, and the emerging shift of service- sector jobs (such as software programming) to India, in particular.
The offshore migration of services jobs captivated corporate officers at Davos, Roach said.
“In my discussions with a broad cross section of business executives, I was hard-pressed to find any who weren’t contemplating white-collar offshore strategies,” he said.
Whatever their reasons, many executives say they feel more nervous about taking risks, which is another way of saying they’re afraid to spend money.
A fourth-quarter survey of U.S. chief executives by PricewaterhouseCoopers found that 68% believe that the current business environment is making companies risk-averse, the accounting and consulting firm said last week.
Just 5% of the CEOs in the survey said they were taking “significantly” more risks in their business than a year ago -- even though 85% said they were confident they would meet or exceed profit targets this year.
Some Wall Street pros say it would be more surprising if executives weren’t cautious, given what they’ve been through in the last few years.
The recession of 2001 wasn’t severe in terms of consumer spending, but it was horrendous for corporate finances: The operating earnings of the blue-chip Standard & Poor’s 500 index companies suffered their deepest plunge in more than 50 years.
Mindful of that slump, and of the resulting surge in business bankruptcies, many companies feel continuing heavy pressure to bolster their finances, said Gail Fosler, chief economist at the New York-based Conference Board, a business-sponsored research group.
Wall Street analysts, as well as the major credit-rating firms, “are really focused on the issue of the ‘quality’ of corporate earnings,” Fosler said. “So there’s a high value now in terms of marshaling cash.”
At Dow Chemical Co. in Midland, Mich., profit rose last year for the first time in the new century. Although the company’s cash balance reached nearly $2.4 billion at year’s end, a tenfold increase from two years earlier, Dow considers its turnaround as just beginning, said spokeswoman Cindy Newman.
“We just needed to get back to basics and perform, which is what we did,” she said.
Something else may be weighing on corporate spending: Some say the scandal wave that began with Enron Corp.’s collapse in 2001 has fostered a climate of fear in the executive suite -- including fear of making an otherwise honest misstep.
“We see more and more evidence that ‘reputation risk’ is a huge issue with CEOs,” said Daniel DiFilippo, head of the U.S. governance, risk and compliance practice for PricewaterhouseCoopers.
Yet there also are risks inherent in sitting on one’s hands. For instance, there’s the danger that your competitors will beat you to the punch with a new product or will conquer a new market niche before you get there, if you delay capital spending or hiring needed workers for too long.
Some companies that have built huge cash balances say much of it already is earmarked for spending. Intel, for example, has said that it expects capital spending (such as on new plants) and research expenses to total as much as $8.8 billion this year, up from $8.1 billion last year.
Intel builds and owns its semiconductor plants, unlike many rivals that outsource production to contract manufacturers. “We need cash on hand to keep building these plants” as advancements in technology dictate chip design changes, said Robert Manetta, an Intel spokesman in Santa Clara, Calif.
Likewise, one of the company’s key rivals, Sunnyvale, Calif.-based Advanced Micro Devices Inc., expects that its year-end cash balance of $1.3 billion -- triple the total of two years ago -- will help fund a new chip plant it’s building in Germany, said Mike Haase, director of investor relations.
Other companies are less specific about plans for the cash they have accumulated. Harley-Davidson Inc., the Milwaukee-based motorcycle maker, ended last year with $812 million in cash, a record and about double what it had at the end of 2001. But James L. Ziemer, Harley’s chief financial officer, said the firm wasn’t rushing to add extensive new plant capacity despite a 13% rise in sales revenue last year.
“We are a conservative company,” Ziemer said, though he added that “we continue to look at opportunities to invest in the business.”
Many economists say that corporate spending already is on the rise and is sure to accelerate this year.
The government’s report last week on fourth-quarter gross domestic product showed that spending on equipment and software, a broad measure of capital spending, rose at a seasonally adjusted annual rate of 10% in the quarter. That was down from a mammoth 17% increase in the third quarter but still a strong number by historical standards.
“I think it’s happening,” Prudential economist Rippe said of the anticipated corporate spending turnaround.
But whether it results in significant job growth soon still is a major question mark. Buying a new computer is a simpler decision than adding an employee, after all. The computer doesn’t need healthcare coverage.
If executives truly are worried about making strategic mistakes with shareholders’ money, they have another option: send more of the cash directly to shareholders, via dividends.
Many blue-chip firms have sharply raised dividend payments in the last eight months. They have been prodded in part by the tax law change approved by Congress in May, cutting the maximum tax on dividend income to 15%, the same rate as on long-term capital gains.
If corporate caution remains at high levels, fatter dividend payments could be the best hope for new job creation in the economy. By reinvesting the money, or by spending it, investors might well contribute more to economic growth than if the cash just sits in corporate checking accounts.
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Cash back for shareholders
More companies are choosing to funnel more of their earnings directly to shareholders in the form of higher cash dividend payments. A sampling of companies that have raised dividends in recent weeks, and their current dividend yields (dividend divided by stock price):
*--* Annual dividend Latest per share: Pctg. stock. Div. Company Previous New increase price yield HCA $0.08 $0.52 +550% $44.07 1.2% Intel $0.08 $0.16 +100% $30.88 0.5% Arkansas Best $0.32 $0.48 +50% $29.03 1.7% Alberto-Culver $0.42 $0.60 +43% $61.90 1.0% Arthur Gallagher $0.72 $1.00 +39% $32.31 3.1% Avon Products $0.84 $1.12 +33% $68.27 1.6% Lehman Bros. $0.48 $0.64 +33% $82.18 0.8% Fannie Mae $1.80 $2.08 +16% $77.77 2.7% Bemis $1.12 $1.28 +14% $49.39 2.6% Citigroup $1.40 $1.60 +14% $49.31 3.2% McGraw-Hill $1.08 $1.20 +11% $76.67 1.6% Exelon $2.00 $2.20 +10% $66.04 3.3%
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Sources: Times research, Standard & Poor’s
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Tom Petruno can be reached at tom.petruno@latimes.com.
