Big companies are awash in cash as economy picks up
The brutal recession has left many American families, small businesses and state and local governments in financial ruin or teetering on the brink.
But it’s a much different story for the nation’s biggest companies. Many have emerged from the economy’s harrowing downturn loaded with cash, thanks to deep cost-cutting that helped drive unemployment into double digits.
And although the banking crisis starved countless entrepreneurs for money last year, credit was never scarce for business titans.
Corporate America’s robust finances have been a boon for the companies’ stocks: On Tuesday, the blue-chip Dow Jones industrial average hit its highest level in nearly 18 months, surging 102.94 points, or 1%, to 10,888.83.
Some experts say the strength of the largest firms will be a key advantage for the nation in the next phase of the economic recovery.
“The good news for America now is that companies are very competitive, flush with cash and ready to expand,” said Joseph Carson, an economist at money management firm AllianceBernstein in New York.
But others worry that the business giants’ clout has increased significantly at the expense of workers -- the millions in the ranks of the jobless as well as those who remain employed but must work harder than ever.
“More and more of the balance of power in society is shifting toward corporations,” said Thomas Kochan, a management professor and co-director of the Institute for Work and Employment Research at MIT in Cambridge, Mass.
By one prominent measure, major companies had extraordinary success weathering the recession: Industrial companies in the Standard & Poor’s 500 index, a list that includes such giants as 3M Co., Coca-Cola Co. and United Technologies Corp., ended last year with a record $832 billion in cash and short-term securities on their books, up 27% from a year earlier.
“The big question is what do they do with it,” said Susan Sterne, an economist who heads Economic Analysis Associates in Greenwich, Conn.
The U.S. economic recovery could be stunted unless a large share of that corporate wealth flows to average workers, either in the form of new jobs or higher wages, some analysts say.
“If we don’t get jobs growing soon and we don’t give ordinary working families a sense that they’re benefiting from this recovery, there’s going to be an economic price to pay,” Kochan said.
Historically, smaller firms have led the way in U.S. job creation, not multinational Fortune 500 companies. But economists note that smaller companies provide many goods and services to larger firms, so the good health of the giants should help firms down the food chain.
There have been some signs that businesses overall are beginning to reinvest their cash mountain. The government’s chief measure of capital spending, outlays for equipment and software, rose sharply in the last three months of 2009 after plummeting in the first half of the year.
Cisco Systems Inc., the San Jose company that is the world’s leading producer of computer networking equipment, last month said it expected this year to add up to 3,000 workers to its worldwide staff of 66,000 employees to keep up with rising demand.
AllianceBernstein’s Carson points to surprising strength in recent months in the manufacturing sector, which has been helped by the dollar’s slide since 2001 and rising demand abroad for U.S. exports.
Yet many major firms have remained cautious about hiring, even after the economy began to bounce back in the second half of last year.
FedEx Corp., the shipping giant, last week said its profit more than doubled in the quarter ended Feb. 28 compared with last year’s depressed level. Although the company early this year reinstated merit-based pay increases, it remains “very strict” on hiring, said Chief Financial Officer Alan Graf Jr. No job can be filled without the OK of a senior management committee.
The Business Roundtable, a group whose members include chief executives of the largest U.S. companies, found in a fourth-quarter survey that 68% of its members expected sales to rise in the first half of this year. But just 19% said they expected to boost U.S. employment in the period.
John Castellani, president of the Business Roundtable, said the reluctance to hire in part reflected uncertainty about the staying power of the economic rebound -- a common refrain of executives.
“Demand is still pretty weak in the U.S.,” he said.
What’s more, companies have complained that they face serious uncertainty over the future of employee-benefit costs given the Obama administration’s far-reaching overhaul of healthcare.
Huge gains over the last year in worker productivity -- output per hour worked -- also have reduced the need for additional staff in the near term. The harder people work, the less their employers may feel the need to add to payrolls.
Non-farm productivity rose at a 6.9% annual rate in the fourth quarter of last year after surging more than 7.5% in both of the preceding quarters.
Before hiring can begin, “the bad news is you’ve got to burn off those productivity gains first,” Castellani said.
Many companies, big and small, were quick to slash their payrolls in the second half of 2008 and first half of 2009 as the economy crumbled. Massive job cuts drove the country’s unemployment rate from 5.5% in mid-2008 to a 26-year high of 10.1% last October. The rate has since eased to 9.7% as of February.
By hacking payrolls and wringing much more productivity out of workers who remain, companies were able to conserve cash as sales slumped.
United Technologies, a conglomerate that makes jet engines, elevators, air conditioners and other big-ticket goods, saw its fourth-quarter sales drop 5% from 2008. Nonetheless, the company’s businesses produced a slightly larger profit than a year earlier thanks to a “relentless focus on costs,” CEO Louis Chenevert told shareholders in the quarterly earnings report.
That profit helped boost the company’s cash hoard to $4.45 billion on Dec. 31, up from $2.9 billion two years earlier.
Big firms “have demonstrated a lot of financial flexibility in this crisis,” said Carol Levenson, research director at Chicago-based Gimme Credit, which evaluates companies’ finances.
Corporate America also has benefited from its ability to borrow money despite the ongoing credit crunch. Rather than seek loans from banks, which have made credit tougher to get, many companies have been able to raise capital by selling long-term bonds over the last year, including to refinance older, higher-cost debt.
Amgen Inc., the Thousand Oaks-based biotech leader, this month sold $1 billion in new bonds to finance its business.
Individual investors, while wary of the stock market, have been big buyers of bonds, helping to channel cash to major companies. Americans in 2009 poured a record $375 billion into bond mutual funds, creating robust demand for new bonds. Already this year, an additional $75 billion has flowed into all types of bond funds.
As corporate coffers have refilled, some companies have opted to return some of that cash to shareholders. Soft drink and snack food titan PepsiCo Inc. last week said it may buy back as much as $15 billion worth of its own shares over the next three years. The company also boosted its quarterly cash dividend payment to shareholders by 7%.
PepsiCo’s shares on Tuesday hit a 17-month high.
But the stock market’s ability to continue to rally ultimately will depend on the strength of the economic recovery. And without job creation, economists say, the sustainability of the recovery will remain suspect.
Of course, no company will hire simply to add a body to its workforce. But some analysts believe that many firms soon will be able to justify hiring as cash builds up, the economy continues to expand and sales and earnings rebound. This quarter, the S&P 500 companies’ earnings are expected to surge 36% from a year ago, according to analyst estimates tracked by Thomson Reuters.
Although the devastating recession understandably has left company managers wary of being too bold, “I think we’re really close in terms of seeing job growth,” said Michael Darda, chief economist at investment firm MKM Partners in Greenwich, Conn.
Corporate America’s financial health may have come at the expense of jobs last year, but it will set the scene for a turnaround this year, Darda said.
Historically, he said, “a strong and lasting recovery starts with corporate earnings.”