By Sebastian Pellejero and Paul J. Davies
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 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 utility 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.
Among investment-grade borrowers tracked by BNP Paribas, the
ratio of current assets to current liabilities -- which BNP uses to
estimate liquidity -- has risen this year to 86% in Europe and 97%
in the U.S. Those levels have only been exceeded since 2000 during
late 2009-early 2010 in the U.S. and mid-2004 in Europe.
Companies in the Stoxx Europe 600 have also posted a similar
rise, with average short-term liquidity ratios forecast to finish
2020 at 172%, up from 159% at the end of 2019 among companies for
which data is available in FactSet. In the S&P 500, companies
are forecast to finish the year at 192%, up from 170%.
The biggest growth in liquidity ratios forecast is at companies
such as Deere & Co, Booking Holdings and Southwest Airlines Co.
in the U.S. and Ferrari NV and Volkswagen AG in Europe, according
to FactSet.
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, U.S.
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 Bank of America Corp. report.
Some investors believe that companies 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."
Some expect reduced borrowing to boost corporate bond prices
next year. In Europe, where the European Central Bank is expected
next week to increase the scale of its bond-buying program, the
amount of government bonds available for investors to buy is
expected to shrink by the most since 2016, according to BofA. That
year, net new government bond issuance available to investors in
Europe was negative EUR459 billion, equivalent to negative $558
billion at current exchange rates. Next year it is expected to be
almost as much.
"Next year, the expectations are for no meaningful corporate
bond issuance because companies are sitting on huge cash buffers
that are no longer needed," said Ralf Preusser, rates strategist at
BofA.
That means more investor money chasing returns in debt from
weaker governments, compressing the difference between Italian and
German government yields further, for example. It could also push
investors to seek yield from higher-risk, junk-rated bonds.
Investors also expect more 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 recovers.
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 in the U.S. 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."
Elsewhere in bond markets, U.S. Treasury yields rose Friday to
their highest levels in almost a month after the November jobs
report signaled a sharp slowdown in the labor-market recovery. Bets
that weaker economic data increases the odds of more fiscal
stimulus from Congress fueled the climb, some investors said.
The yield on the benchmark 10-year Treasury note finished
Friday's session at 0.967%, according to Tradeweb, up from 0.919%
at Thursday's close and the highest settle since Nov. 10. The
30-year Treasury bond yield rose to 1.728%, from 1.666% Thursday,
also its highest close since Nov. 10.
Write to Sebastian Pellejero at sebastian.pellejero@wsj.com and
Paul J. Davies at paul.davies@wsj.com
(END) Dow Jones Newswires
December 04, 2020 16:35 ET (21:35 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
Delta Air Lines (NYSE:DAL)
Historical Stock Chart
From Aug 2024 to Sep 2024
Delta Air Lines (NYSE:DAL)
Historical Stock Chart
From Sep 2023 to Sep 2024