Many companies hoarded cash during the recession and financial crisis as a precaution against the worst-case scenarios that were being carelessly bandied about in the financial media. Nearly one year after the trough of the market back in March 2009, almost 400 non-financial companies in the Standard and Poor's 500 have reported total holdings of $932 billion in cash and short-term investments as of December 31st, 2009. This total was up 8% sequentially and 31% year over year. What will these companies do when market conditions encourage them to deploy their huge war chests?
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Gobbling Up Market Share
Although revenues, earnings and cash flow fell sharply due to the recession, many companies instituted sharp cost cutting to deal with that. Also, many companies disappeared through bankruptcy over the last few years, leaving the competitors still standing with the opportunity to capture business.
Circuit City filed for bankruptcy in November 2008 and closed its stores shortly after. This had the effect of making Best Buy (NYSE:BBY) stronger in the long run since they two chains competed in many of the same markets.
Hhgregg (NYSE:HGG), another electronics retailer, also took advantage of the woes of its competitor. It announced that it was opening up in five former Circuit City locations in Maryland.
The large cash holdings have led to an increase in stock buybacks and dividends. Standard and Poor's reports that 62 share buybacks were announced in February 2010, totaling $40.1 billion. (Find out what share repurchases mean for shareholders in A Breakdown Of Stock Buybacks)
The companies with the highest cash holdings include the usual suspects in the technology sector like Apple Computer (NYSE:AAPL) with $24.8 billion, or Cisco Systems (Nasdaq:CSCO) with $40 billion. Microsoft (Nasdaq:MSFT) has $36.1 billion in cash and equivalents, and Oracle (Nasdaq:ORCL) has $20.8 billion.
Cash isn't everything, however. While the $25.5 billion in "gross cash" that Ford (NYSE:F) has on its balance sheet may seem impressive, the company does have to contend with paying interest on its $34.3 billion in total automotive debt.
This large cash hoard may lead to a sharper recovery than is currently being predicted by market pundits, who have been insistent that the recovery will be sluggish and with little job growth. It could be that the improved balance sheets of many companies will make them more likely to build inventory or expand when the recovery starts.
Large cash holdings are a logical consequence of sharp management teams buckling down during a recession, cutting costs and taking advantage of competitor downfalls. These companies may lead us back to prosperity and employment when the recovery begins.
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