The $2 Trillion Corporate Cash Hoard Is Only Getting Bigger

Much has been made about the $1.9 trillion sitting on the balance sheets of non-financial U.S. corporations.

And evidence suggests that cash hoard is only getting bigger.

RBC Capital Market’s Myles Zyblock notes that because corporate profitability has been so high, corporations have been able to generate more than enough cash flow from operations to finance all of their capital expenditures.

“From a flows perspective, capital expenditures are being surpassed by internally generated cash flows at a quarterly annualized rate of ~$200 billion,” writes Zyblock.  “Thus, companies are still adding significantly to their $1.9 trillion cash mountain.”  See the chare below:


Photo: RBC Capital Markets

Much has also been made about corporations returning cash to shareholders by initiating share repurchases, increasing dividends, and introducing new dividends.  Even Apple recently jumped into the fray.

However, most companies are largely financing these dividend and repurchase activities by borrowing money at the ultra-low rates in the highly liquid credit markets.


Photo: RBC Capital Markets

All of this borrowing is increasing the amount of leverage on corporate balance sheets.  Nevertheless, these corporations are having no problems paying there bills.  Thanks to record high profit margins and ultra low interest rates, interest coverage ratios (i.e. pre-interest income divided interest expense) are at multi-year highs.


Photo: RBC Capital Markets

So, there’s little to suggest that the record corporate cash loads will be getting smaller anytime soon.

However, Zyblock also warns that this can’t last forever.  “[W]ith net margins peaking and an eventual increase in rates, corporations could have trouble servicing this debt load in the future.”

SEE ALSO: Wall Street’s Sharpest Minds Predict Where Stocks Are Heading In 2012 >

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