By Maria Armental
U.S. corporate balance sheets are continuing to feel the impact
of the 2017 U.S. tax overhaul, as companies pivot their capital
allocation strategies in response to the new law.
Companies funnelled record amounts of cash to stock buybacks,
dividends, capital spending and acquisitions last year. As a
result, U.S. corporate cash holdings fell to a three-year low of
$1.685 trillion in 2018, according to a report from Moody's
Investors Service Inc.
The drop in corporate cash hoards, the first since 2015, came as
companies rushed to take advantage of lower taxes on foreign
income.
Apple Inc., again the top cash holder, saw its cash pile drop
14% to $245 billion. Rounding up the top five were: Microsoft
Corp., Alphabet Inc., and newcomers Amazon.com Inc. and Facebook
Inc., which replaced Cisco Systems Inc. and Oracle Corp. in the top
five.
Combined, the five companies held $564 billion, or 33% of the
total nonfinancial corporate cash balance, down from $675 billion,
or 34% in 2017, according to the report, which looked at 928
U.S.-based, nonfinancial companies.
Representatives for Alphabet, Microsoft and Amazon declined to
comment. The other companies didn't return requests for
comment.
Many U.S. companies, particularly in the fast-growing technology
sector, built up massive hoards of cash offshore as they opted to
keep profits earned in foreign countries outside of the U.S. That
strategy was largely motivated by U.S. tax law, which levied a 35%
corporate tax, net of taxes paid in foreign jurisdictions, on money
that companies chose to repatriate.
But since the 2017 tax-law overhaul, which imposed a one-time
tax on accumulated foreign profits, some companies have shifted
tactics, bringing some or all of that money home. Companies sent
$664.91 billion of their foreign earnings back to the U.S. in the
form of dividend payments in 2018, up from $155.08 billion the year
before, according to data from the U.S. Commerce Department.
Cisco, which was a top-five cash hoarder last year, lost that
billing in part because of such a strategy shift. The company last
year announced plans to repatriate $67 billion of its foreign cash
holdings, and deploy much of that cash on share repurchases and
dividends.
The San Jose, Calif., company said it would continue to direct
cash to deal making along with stock buybacks and dividend payouts
to shareholders. "We are not a capital-intensive business," a Cisco
spokeswoman said in an email.
Moody's analysts expect companies to continue tapping into the
cash piles in the coming years as they pay down debt and boost
returns to shareholders through dividend payouts and stock
buybacks.
Apple, for example, has laid out plans to become net cash
neutral, with an equal amount of cash and debt.
In February, the iPhone maker began a $12 billion accelerated
share-repurchase program and has since boosted its dividend by 4
cents to 77 cents a share and raised its share repurchase
authorization by $75 billion to $175 billion.
"Our priorities for cash have not changed over the year," Chief
Financial Officer Luca Maestri said in a conference call in April,
when the company released financial results for the first half of
its business year.
As of March 31, Apple had about $225 billion in cash and a net
cash position of almost $113 billion, Mr. Maestri said during the
earnings call.
Moody's report found that share repurchases, net of stock
issuance, nearly doubled in 2018 to a record $467 billion, driven
by strong cash generation and supported by the tax overhaul.
This year, it will still be a "healthy number," albeit likely
not a record as companies err on the side of caution given
apprehensions about the economic outlook, said Richard Lane, senior
vice president at Moody's and the report's lead author.
Meanwhile, aggregate debt rose 1.4% to $5.655 trillion in 2018,
the lowest increase in a decade, Mr. Lane said.
Still, leverage ratios improved on an earnings before interest,
taxes, depreciation and amortization basis and as measured by free
cash flow.
That means a company is more likely to be able to repay or
refinance debt.
Write to Maria Armental at maria.armental@wsj.com
(END) Dow Jones Newswires
June 10, 2019 07:14 ET (11:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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