T AT&T Inc

By Sebastian Pellejero 

U.S. companies are sitting on the largest pile of cash ever. Investors are trying to gauge how they are going to use it.

Cash holdings at nonfinancial companies grew to a record $2.1 trillion at the end of June, according to a recent report from Moody's Investors Service. That is up 30% from that time last year and higher than the previous peak of nearly $2 trillion in 2017. Among the biggest hoarders: AT&T Inc. and Delta Air Lines Inc., which each held more than $15 billion at the end of June.

Other measures show some of America's largest companies continued to hang on to record cash stockpiles at the end of the third quarter. The amount held by S&P 500 companies not in the financial, transportation or utilities sectors is expected to total around $1.9 trillion, according to data compiled by S&P Dow Jones Indices. That is the most cash ever held by that group in data going back to 1980.

Cash hoards swelled this year after companies issued record-breaking amounts of debt to bolster their balance sheets against the Covid-19 pandemic's disruptions. As of Nov. 30, companies had sold more than $2 trillion of investment-grade and high-yield bonds -- the most on record in data going back to 2006 -- according to LCD, a unit of S&P Global Market Intelligence.

At the same time, many cut share repurchases, dividends or capital expenditures. Now that is starting to reverse, raising hopes for moves such as buybacks, which can drive share prices higher, and paying down debt, which reduces risk for bondholders.

Wall Street analysts expect companies to start dipping into more of their cash next year. Some investment-grade companies have taken initial steps to lower their debt loads, while continuing to hoard cash in anticipation of a surge in infections this winter, according to a BofA Securities report.

Some investors believe that firms will spend on capital projects or hire more employees rather than paying down debt, given that the Federal Reserve expects to keep interest rates near zero for the near future.

"It doesn't make sense for cash-laden companies to pay down debt in this interest-rate climate," said David Kotok, chief investment officer at Cumberland Advisors. "That cash is going to be put to more shareholder-friendly uses."

Another option: mergers and acquisitions. A flurry of deal activity, including S&P Global Inc.'s $44 billion agreement to buy IHS Markit Ltd. and Facebook Inc.'s move to purchase Kustomer, indicates more companies are looking to expand as the U.S. economy continues to recover.

M&A activity remains historically low for the fourth quarter, indicating many companies still hesitate to pursue big purchases at this moment. As of Monday, around $313 billion in acquisitions have been announced during the fourth quarter, according to Dealogic, the lowest amount for that period since 2013.

"The unintended consequence of this situation is all of a sudden companies have a lot of cash," said Thomas Majewski, managing partner at Eagle Point Credit Management. "That money burns a hole in companies' pockets quickly, so they will be looking to be acquisitive next year."

Write to Sebastian Pellejero at sebastian.pellejero@wsj.com

(END) Dow Jones Newswires

December 04, 2020 08:14 ET (13:14 GMT)

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