Cash Is King: Large Companies Accumulating Reserves

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A December 27 report by FactSet Insight highlights the fact that companies in the S&P 500 (INDEXSP:.INX) are accumulating cash at a rapid pace. The report does not go into great detail as to why these larger companies are ending up with so much more cash on their balance sheets, but it does mention the recent Verizon Communications Inc. (NYSE:VZ) debt offering (relating to Vodaphone deal) and “large cash inflows from operations” as two primary factors.

Cash up 18% in Q3

Cash and short-term investment balances among S&P 500 companies (ex-Financials) increased by more than 18.0% year-over-year in Q3 2013, and closed at a total of $1.36 trillion. The cash position for S&P 500 companies only grew by grew 14.0% year-over-year if you strip out Verizon.

Q3 free cash flow

Third quarter 2013 free cash flow approached record levels. FactSet summarizes the situation. “S&P 500 companies generated $351.3 billion in free cash flow in Q3, the second largest amount in at least ten years. This amounted to 7.2% growth year-over-year, and, as a result of slower growth in fixed capital expenditures (+2.2%), free cash flow (operating cash flow less fixed capital expenditures) grew at a higher rate of 11.3%. Free cash flows were also at their second highest quarterly level ($196.8 billion) in Q3.”

Sector analysis

Eight of the nine sectors that represent the S&P experienced positive free cash flow year-over-year. The energy sector was the star performer, with free cash flow increasing by a scintillating 208%, although the energy sector cash flows are notoriously volatile and not necessarily good indicators.

Free cash flow increased in the health care sector by a strong 21.4%, even though $32 billion free cash was generated the prior year. In the sector, Pfizer Inc. (NYSE:PFE) ($5.6B), Johnson & Johnson (NYSE:JNJ) ($5.1B), UnitedHealth Group Inc. (NYSE:UNH) ($3.0B), and Merck & Co., Inc. (NYSE:MRK) ($3.6B) created the greatest free cash flows.

Shareholder distribution versus debt issuance

The FactSet report also pointed out that shareholder distributions (dividends and net repurchases of stock) increased 25.6% y-o-y in Q3 to $169.6 billion. Balancing this out, however, was the fact that cash inflows from debt issuance at $93.8 billion were up again for the thirteenth consecutive quarter.

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