Why Apple and other blue-chip companies are starting to spend their cash
Corporate America has been giving more and more cash back to investors through dividends and stock buybacks. Companies are also using some of their excess cash on mergers.
But many big companies are still sitting on a LOT of cash — even though it earns next to nothing on their balance sheets, because interest rates are so low.
Tech giants Apple, Alphabet, Microsoft, Amazon and Facebook have about a half trillion in cash combined, for example. Apple alone has $206 billion. That’s down from a year ago, though, and market experts are hopeful that more of this cash will find its way into the pockets of investors.
Apple bought more than $18 billion worth of its own stock in its most recent quarter. Buybacks reward investors by reducing the amount of stock that’s outstanding. That boosts earnings per share. Apple also paid out $3.5 billion in dividends last quarter.
Changes to the US corporate tax code in 2017 have allowed companies to bring back cash they had sitting overseas at a lower tax rate of 15.5% compared to the previous rate of 35%. So it’s no surprise that many big companies are rushing to bring the cash back and dole out some of it to shareholders — although many companies are also taking advantage of low rates to borrow more and use those proceeds for dividends and buybacks as well.
Moody’s noted in a report in June that non-financial firms had $1.7 trillion of cash as of December 2018, down more than 15% from a record level of just under $2 trillion a year earlier. (Banks, which need cash for lending and to meet stricter regulatory requirements following the 2008 financial crisis, are not included in this total.)
“With improved access to global cash following the tax overhaul, we expect aggregate cash balances will continue on a declining path, particularly as many cash-rich companies repay maturing debt and return more cash to shareholders,” said Richard Lane, a senior vice president with Moody’s, in the report.
Cash may find its way back to workers and not just investors
Apple is also using some of its cash to benefit the greater good — and not just on Wall Street.
The company announced plans earlier this week to spend $2.5 billion on programs to help address the housing crisis in the San Francisco Bay area and the rest of California. Google and Facebook have also committed money to try and solve this problem.
That trend should continue as interest rates have come down thanks to three rate cuts from the Federal Reserve this year.
“Money is so cheap. So corporations are looking to put their cash to work and some of that will be done through philanthropic investments,” said Jill Garvey, senior wealth strategist with Huntington Private Bank in an interview with CNN Business.
Still, many economists and critics are waiting for large companies to start using their cash to pay their employees higher salaries, give out bigger bonuses and spend on other benefits.
According to the latest jobs report, wages rose 3% over the past 12 months. That’s higher than the rate of inflation but many economists have argued that wage growth should be much higher at this stage of the economic growth cycle. The economy and stock market bottomed out more than 10 years ago. It’s just been a sluggish recovery for many American workers.
That may soon change. On the lower end of the spectrum, many retailers and restaurants have already started to boost minimum wages — even above the lowest hourly rates mandated by the laws of various states and cities.
And Mona Mahajan, US investment strategist at Allianz Global Investors, said tech companies and other services firms may soon have no choice but to use their cash to pay skilled workers bigger salaries, especially if the labor market remains this tight.
“Normally we’d see a bigger pickup in wage growth at this stage of the cycle and we haven’t seen it. But at some point companies will have to pay more for talent,” Mahajan said.