When the recession hit a few years ago, many companies saw drastic drops in their value. Suddenly consumers were not purchasing, companies were not selling, and the overall value of the business dropped. Smaller companies couldn’t handle the pressure, and they folded. Bigger companies restructured and began to stockpile cash.
For a big company to accumulate cash means that they are bracing themselves for more large downturns in the economy. Now, long after the recession has ended, these companies are still stockpiling cash. One of the biggest hoarders has been Apple.
Suddenly surging to popularity with their smart phone innovations, Apple has recently become a huge success. But they too suffered when the market dropped. Instead of crumpling, however, the company leapt forward with more innovative products, and they started stockpiling cash. By the end of 2012 they had billions of dollars in cash, so much that a third of their market cap was just that. It wasn’t until early in 2013 that they started returning some of that cash to shareholders in the form of stock repurchases and dividends. Even now the cash held by the company is close to $150 Billion. They are taking measures to buy back stock and issue earnings as dividends, but why the cash in the first place?
It must be noted that Apple is not the only company doing so. In fact, the stockpile of cash for the largest companies in the US is approaching $1 Trillion. These companies expand, hire, build, and research. In order to do that you need a lot of money. To get where they are now, they borrowed it. The banks were lending, they got their money cheaply, and they turned around and made a lot of money off those loans. After the recession, however, banks tightened their belts. Rather than fight for a loan, the companies simply held on to profits, this way if they need anything they can dip into their own coffers instead of asking for it from a bank.
Holding on to cash is a smart move on the part of the company. But for the shareholders, and the public wanting to see the economy boom again, it seems selfish. Until things in the global economy start to look a little more stable (that is no more threats of war, no threats of major economies collapsing, and overall currencies are doing well) it is safe to say that these companies will keep their cash close. When they can trust the global economy to play nice, they will once again start spending and lending. Many are doing so already, but it takes a long time to spend $150 Billion.
This article was first published on http://moneyprime.com.