News Article

Credit Insurance

One-quarter of FTSE 100 non-financial* companies hold 80% of cash

By CreditMan Wednesday, January 22, 2014

Cash reserves of large corporates are concentrated in fewer firms, research by Deloitte reveals. At the end of June 2013, the 20 large cash holding FTSE 100 non-financial companies held US $144 billion in cash reserves * (up from US $140 billion at the end of 2012). This equates to 80% of all cash held by FTSE 100 non-financial companies. The remaining 60 small cash holding companies currently hold US $37 billion (20%) of company cash (down from US $44 billion at the end of 2012).

Iain Macmillan, Head of M&A at Deloitte, comments: “The perception is that there are many businesses sitting on record cash stockpiles when in fact the cash sits in the hands of the very few. The polarisation between those who have large stockpiles of cash and those who don’t has only widened during the first half of 2013. Moreover, there are key differences in spending patterns between these two groups.

“Looking ahead, the wave of cash that many are expecting will depend on the decisions of a few, rather than the many. The overriding theme for 2014 seems to be a return to growth for many of the world’s advanced economies. A steady recovery, both in optimism and the economy, may finally be the tipping point for companies to start spending cash aggressively in pursuit of growth.”

How companies spend their cash
In terms of spending, large cash holding companies were increasingly focusing on capital expenditure (capex), with a 53 per cent rise in capex from 2007 (US $96 billion) to 2012 (US $147 billion).

In 2012 large cash holding companies channelled over 80 per cent of their cash from operations towards capex. Small cash holding companies have maintained a relatively steady flow of cash to capex at around 48 per cent of their cash from operations (US $25 billion).

When M&A spend was considered the opposite result was found to be true. Large cash holding companies spent just 43 per cent (US $44 billion) of cash reserves on M&A activities in 2012, up from US$ 30 billion in 2007. Small cash holding companies spent a huge 124 per cent of their cash reserves, (US $28 billion) on deal activities in 2012. This is the highest level since the vintage M&A year of 2008.

Macmillan added: “Small cash holding companies which have been more aggressive in their pursuit of growth have seen their revenue growth and share price performance outperform their richer counterparts. While financial conservatism has allowed companies to navigate the crisis, a substantial financial buffer could prove a double-edged sword when the markets appear to reward companies who are more bullish in their pursuit of growth.”

CEO tenures
One explanation for the apparent diverging financial attitudes could be differences in the tenure of CEOs. CEOs at smaller cash holding companies had an average tenure of 74 months compared to a much shorter 43 months at large cash holding companies.

Macmillan concluded: “Steering a company through the tough years as well as the good ones is likely to boost confidence in making more aggressive investment decisions. Those sitting on large cash piles may come under pressure as investors look to see greater proactivity with cash to generate larger returns.”

Non-financial companies refers to those companies not within the financial services sector (totalling 80 companies).

Large cash holding companies refers to those with cash or near cash items in excess US$2.5 billion. Small cash holding companies refers to those with cash or near cash items of less than US$2.5 billion.

‘Cash reserves’ refers to cash and near cash items and marketable securities and other short-term investments.

‘Capex spending’ can refer to a wide variety of activity depending on the sector of the business (E&R, CB, TMT, LS&H, BPS). One example would be Vodafone, which includes cash outflows for the purchase of property, plant and equipment and computer software as typical capex spending.

Source - Deloitte