Cash on corporate balance sheets hit an all-time high in the third quarter, just as the U.S. Congress began work in earnest on revisions to the tax code aimed in part at spurring economic growth by encouraging companies, especially those with money parked overseas, to use those dollars to increase investment. But while repatriating the cash piles held offshore would put more money at the disposal of corporate executives, it is not clear they would use the funds to build new plants or hire more workers.
Corporations have been hoarding cash ever since the depths of the 2007-2008 financial crisis, and since the 2007 second quarter, have increased their holdings on a year-over-year basis for 39 of 41 quarters. Over that time, the cash pile has grown 163%. Much of the cash is held overseas, and Republicans' tax reform proposals could encourage companies to bring it back to the U.S.
When Congress passed a repatriation tax holiday in 2004, various studies found companies spent anywhere from 25% to 92% of the money on dividends or share buybacks. Goldman Sachs analysts pegged the number at 75% of repatriated funds used on shareholder returns.
Whatever the figure for the 2004 holiday, Jarrad Harford, a finance professor at the University of Washington who has studied corporate cash, said repatriated funds in today's economy would be more heavily weighted toward shareholder returns.
"The sense now is that external financing is not as dire as it was," Harford said. "And so it's not clear that firms are feeling so constrained that if they suddenly had access to this capital they have all these positive [net present value] projects that they had been wanting to take."
The five largest cash holders have 88% of their total cash and equivalents held in overseas entities, according to a Nov. 30 report from Moody's. House and Senate tax reform proposals suggest a one-time tax of 14% to 14.5% for repatriating cash and a rate of 7% to 7.5% for illiquid cash-like instruments.
Harford said business leaders realized there would likely be a repeat of a 2004 repatriation tax holiday, a bet that appears due to pay off as the Republican tax reform legislation includes a lower tax rate for repatriated profits.
"The number of firms doing it gives you some kind of cover in terms of: 'We're not crazy — out there on our own building up cash.' And for whatever reason, shareholders have become broadly tolerant of these large numbers of uninvested, retained earnings," Harford said.
For the short term, that means tax reform would cause a one-time expense for companies that repatriate significant amounts of cash. JPMorgan Chase & Co. said Dec. 5 that its repatriation expense could be as large as $2 billion.
In May, analysts for S&P Global Ratings predicted a repatriation holiday would result in significant amounts of overseas cash brought to the U.S. "largely for share repurchases, but also for acquisitions and some debt repayments."
The more than $1.5 trillion in cash from retained earnings represents a "disconnect" between corporate profitability and capital expenditures, said Brian Coulton, chief economist for Fitch Ratings, in an email. "If that disconnect were to persist it could reduce the impact of tax cuts on investment spending," Coulton wrote. At the same time, Coulton said there are signs, such as recent business surveys, that capital expenditures could be on the rise.
How much of repatriated cash or tax savings is spent on capital expenditures versus on shareholder returns could be the crux of whether the Republican tax reform jump-starts economic growth.
"I think it's safe to say [more corporate cash] doesn't necessarily lead to increased investment," Harford said. "There is a positive correlation between internal slack and investment, but it's not [one-to-one]."
In aggregate, the S&P 500 — excluding financials, utilities and transportation companies since those businesses generally hold significant cash reserves — reported $1.58 trillion of cash and cash equivalents in the third quarter. That represented an increase of 3.2% from the previous quarter and 6.5% from the year-ago period.