WASHINGTON – Corporate cash piles remain high and growing in banks, but a significant stream is flowing into corporate investment, according to a new study from the Association for Financial Professionals (AFP).
The 2013 AFP Liquidity Survey, underwritten by RBS Citizens, found that treasurers and CFOs were more likely to have expanded corporate cash and short-term investment holdings over the past year than to have contracted them (40 percent vs. 22 percent). Companies that increased cash holdings did so primarily as a result of higher operating cash flows and companies that reduced cash were making clear investments for the future, often taking the opportunity to acquire or launch businesses.
Top reasons for paring reserves include:
- Acquiring a company or launching new operations (36 percent)
- Increasing capital expenditures (32 percent)
- Retiring debt (19 percent)
- Share repurchases or dividends (16 percent).
“Though treasurers and CFOs are cautious, these are significant amounts of cash being invested in American businesses,” said Jim Kaitz, AFP’s president and CEO. “If the trend continues to play out as we expect, business investment will continue to rise.”
On investments, safety first
Companies continue to maintain conservative investment strategies, the survey found, with 74 percent of their short-term investment balances placed in three investment vehicles—banks, money-market funds and treasury securities.
Despite the expiration of unlimited FDIC insurance (Transaction Account Guarantee, or TAG) at the end of 2012, companies did not pull their cash from banks. In fact, three out of five companies indicated that expiration of TAG had no effect on their investment strategies. About the same percentage of corporate cash resides in banks as did last year—50 percent, compared to 51 percent in 2012.
“Today, companies are clearly seeking safety and soundness,” said Jim Gifas, Head of Treasury Solutions, RBS Citizens. “Across the board, we see that the primary focus is on preservation of capital, and treasurers and CFOs are eager to see how this is being managed on a global scale.”
Uncertainty about the future of money-market funds (MMFs) is one likely culprit for the large amounts that continue to be held in bank deposits as companies seek safety of principal. MMFs are expected to shift to a floating-rate net asset value structure and may include redemption restrictions that could affect institutional investors, according to a proposal from the U.S. Securities and Exchange Commission. Financial professionals indicated in the survey that their companies are likely to further divest from MMFs should these proposals take effect.
As controversy swirls around MMFs, corporate holdings have already declined from previous years to just 16 percent of short-term investments in the 2013 survey, down from 30 percent as recently as the 2011 survey.
About the survey
AFP conducted the survey in May 2013, generating 885 responses. The survey respondents were senior finance and treasury executives from a broad range of companies—typically U.S.-based multinationals with a median of $2 billion in revenue.
Download key findings from the AFP 2013 Liquidity Survey on www.afponline.org/liquidity.