The gross amount of cash being hoarded by FTSE 100 companies has increased by GBP42.2bn since the full effects of the recession set in, a rise of more than a third, according to research commissioned by Capita Asset Services, part of Capita plc.
The analysis of the balance sheets of FTSE 100 companies (excluding financials such as banks) shows that cash and cash equivalents have hit GBP166bn – up GBP42.2bn, or 34 per cent compared to 2008, as companies cut investment and retained earnings following the financial crisis.
This increase in gross cash balances is equivalent to more than a third of the UK government’s annual fiscal deficit, or roughly the bill for HS2. The average FTSE 100 company now has a gross cash pile of GBP1.9bn.
But gross cash balances do not tell the whole story. Net cash positions have changed much more dramatically as companies have also paid down short-term debt since the recession. The net cash position of FTSE 100 firms has increased six-fold, climbing to GBP73.9bn – a rise of GBP61.7bn from GBP12.2bn in 2008.
Companies have paid down GBP19.6bn in short-term debt since 2008. In total, it has fallen by 17.5 per cent across the FTSE 100 to GBP92bn. One explanation for the drop could be companies refinancing short-term debt as credit conditions eased, with long-term borrowing in the same period climbing by approximately 11 per cent.
At sector level, the biggest increase in gross cash by far has been with oil and gas producers, who now account for more than one third of the FTSE 100’s cash piles, punching above their weight, given they make up approximately one fifth of the FTSE 100’s total market capitalisation. But the increase has not been limited to one sector. In total, 17 sectors have seen gross cash balances climb over the period, compared to 13 that have seen them fall. However, sectors that have seen cash piles increase have seen them more than double since 2008. In contrast, sectors that have seen decreases have seen cash reduced by an average of just 26 per cent over the same period.
At the broader industry-wide level, 50 per cent more industries have seen cash balances increase than decrease since 2008. Commodities firms have amassed the largest cash reserves, with oil and gas companies boasting GBP59.7bn, and those in basic materials boasting GBP30bn. Oil and gas has also seen the largest drop in short-term borrowing, with companies reducing their liability by GBP13.7bn. As a result, these firms have seen their net cash position improve the most. Only the consumer goods industry still has a negative net cash position, although it has improved by GBP489m.
Justin Damer, commercial director of Capita Asset Services, says: “The credit crunch was a huge shock for firms used to running lean finances. Companies re-engineered their balance sheets to a more defensive structure as the recession bit, paying off debt and stockpiling cash, diverting the funds from business investment, acquisitions or dividends. But they have continued to hoard cash even as the economy has gone up through the gears, and this will prove unpopular with investors, who resent companies sitting on huge cash piles earning low returns. Efficient and effective asset administration is crucial in boosting a company’s success, and can boost returns in the long-term – especially in the context of the sums FTSE 100 companies are dealing with.
“With the economy back on its feet, the key question is what companies will do with their cash reserves – whether they will seek to boost investment, fund mergers or acquisitions, or return the money to investors. If the cash piles do go unspent for a prolonged period of time, there is the risk that government will turn their eye on them for some form of additional tax. While unlikely, there is certainly a precedent, as investors in North Sea oil will remember.”
If companies were to return their gross cash piles to shareholders completely in 2013, the forecast payout from FTSE 100 companies for the year would triple, according to analysis of Capita Asset Services’ UK Dividend Monitor. The overall payout would hit GBP238.4bn, up from GBP72.4 forecast for this year.