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Re:Is your company saving cash? (1 viewing) (1) Guest

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TOPIC: Re:Is your company saving cash?
#1419
WFC ()
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Re:Is your company saving cash? 5 Years, 2 Months ago Karma: 0  
The story isn't really whether cash balances go up (they almost always do in S&P 500 companies in aggregate), but if they decline. They do in good times because there is so much cash flow and they do in bad times because they want a safety net.

Companies certainly want to increase that cash cushion right now for the latter reason. But a company without real growth prospects can only hoard cash for so long. Vulture investors are pretty good at doing the math. Saving cash is only an effective business strategy for so long.

As for Apple, yeah, the cash is beyond ridiculous. They don't do dividends, buybacks or significant M&A. How are they going to get that cash back to investors? It's not so much an issue while the stock is doing well, but look out if the company stumbles.
 
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#1442
Re:Is your company saving cash? 5 Years, 2 Months ago Karma: 0  
Nice detail out from Howard Silverblatt at S&P today:

"On an issue level, I found 44 issues with more cash than Current Liabilities and LTD combined (23 had no LTD), with 31 of them in the Information Technology sector (16 of which had no LTD). Fifty-five issues had at least 25% of their market value in cash (25 IT and 11 Health Care), with 16 having over $10 billion in cash."

He asks, appropriately:

"On aggregate, companies have cash, sidelined investors have cash, and governments have cash (or at least printing presses), but the question remains, when will they spend it?"
 
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#1448
Ron F ()
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Re:Is your company saving cash? 5 Years, 2 Months ago Karma: 1  
WFC nails it with his point about growth rates. True, there are endless arguments to be made about whether hurdle rates really work, and whether the cost of equity can be measured accurately.

But management has to take at least a good guess at whether it can earn a decent enough return by investing the cash in the business or doing a deal that makes sense. If not, then all that cash is going to come back to haunt it. Sooner or later, investors are rightly going to demand their money back, through dividends, buybacks, or the liquidation of the company.

That said, if a company has a ton of debt to service, bondholders are not going to sit still for big buybacks or special dividends or asset sales that hurt the value of their holdings. And that will just drive up the cost of their debt.

That's the two-edge sword of leverage, though. So I wouldn't be surprised if shareholders sit still so long as management uses the cash to pay down enough debt to keep lenders at bay, at least until the credit markets return to normal, if, that is, they ever do.
 
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Last Edit: 2009/08/20 02:00 By Ron F.
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#1463
mcole ()
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Re:Is your company saving cash? 5 Years, 2 Months ago Karma: 0  
According to a report today from the WSJ, companies aren't hoarding cash so much anymore but are using it to buy back bonds in the open market.

This isn't a new thing and I don't think it's announcing better times for these companies.

GMAC was already doing it last year, not because it didn't have other uses for that cash (it's GMAC!!) but because it had so much outstanding debt that it needed to use any way possible to reduce leverage.

And as the WSJ story mentioned, buying back bonds in the open market is a nice way to do so quietly, without alarming bondholders and driving prices down.

So it's not the best companies that are buying back bonds but the ones that really need to clean up their balance sheets.
 
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#1468
Ron F ()
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Re:Is your company saving cash? 5 Years, 2 Months ago Karma: 1  
Makes sense that these companies would be trying to deleverage. But I've always been a little unclear on how this works. I mean what exactly are they accomplishing by borrowing to buy back debt? Presumably, they're effectively terming out maturities or subbing lower rate debt for higher rate stuff, and thus either improving their liquidity or reducing their interest costs.

But boy, this sure seems to be an incremental process with marginal results at best. I remember very distinctly that GE started reducing its reliance on commercial paper issued against off-balance sheet assets back in the early part of the decade after Bill Gross compared the financial engineering to Enron's, however loosely. Yet GE's still trying to delever.
 
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#1472
mcole ()
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Re:Is your company saving cash? 5 Years, 2 Months ago Karma: 0  
I'm not sure if they borrow to buy back debt -- in which case you are right, the only thing they are achieving is extending maturities and hopefully getting a better rate -- or maybe they just use free cash flow.

Then they just go in the open market and buy the bonds like any other investor would do. It's kind of sneaky and bondholders don't usually like it too much because that way the company tries to secure the lowest prices. But ultimately, they do have to disclose it in filings, I'm not sure how often though.
 
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