Treasury Today Country Profiles in association with Citi
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February 2012

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Editorial

The cash pile dilemma

Sitting on a war chest worth $97.6 billion might seem like a nice problem to have. But Apple’s investors are getting hot under the collar and want to see their money put to work. Given that the company’s cash earned a return of 0.77% during the 2011 fiscal year, it’s easy to understand why.

The iPad manufacturer is not the only corporate wondering what to do with its growing cash mountain though. Non-fiscal S&P 500 businesses have collectively stockpiled over $1 trillion in cash and cash equivalents in the last 12 months. Since December 2010, Australian corporates have increased their cash holdings by around 15%. Similar trends are being observed among top tier and mid-market companies in Europe, as well as in emerging markets such as South Africa.

This ‘hoarding’ has touched a nerve among politicians, with many urging corporates to get the economy moving again by splashing some of their cash. In reality though, for most of these companies, there’s a genuine lack of attractive investment opportunities available.

January saw $9 billion flow into US prime MMFs, acknowledging that return of capital is still a priority over return on capital. $3.5 billion of Apple’s $97.6 billion is reportedly invested directly in MMFs.

On the short-term front, although the return that Money Market Funds (MMFs) are currently offering may not be the highest, they are certainly benefiting from this cash investment dilemma. In fact, January saw $9 billion flow into US prime MMFs, acknowledging that return of capital is still a priority over return on capital. $3.5 billion of Apple’s $97.6 billion is reportedly invested directly in MMFs.

Naturally the tech company has long-term investments that go in search of a little more yield, but it must be considering strategic investments too – there’s a lot of cash to go around. While Apple’s CEO Tim Cook has some hard thinking to do, many corporate executives are getting ready to deploy their cash, according to a recent poll from Deloitte.

Of the over 1,000 US corporates polled, 28.2% were looking to put their surplus cash to use through M&A activity, 20.6% were intending to increase capital budgets, 11.8% were looking to repurchase shares and 6.1% were contemplating increasing dividends in 2012. Whether these intentions will actually come to fruition is another matter entirely, however.

Siloed decision-making and a lack of common framework, tools and metrics to measure investment alternatives, the poll revealed, are hampering the execution of a cash deployment strategy for over a quarter of corporates. Typical internal struggles include C-level executives pushing to grow the business through acquisition, while division heads believe that investment in R&D would be a better long-term strategy.

But delaying decisions for ‘political’ reasons can mean opportunities are missed, shareholders become increasingly frustrated with the lack of activity, or cash simply remains idle. The key to successful deployment of surplus cash therefore is not only finding an attractive opportunity, but making sure that you get the appropriate ‘buy-in’ from stakeholders too.