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Is Corporate Cash Funding a House of Cards?

June 30, 2015

Corporate America is sitting on a lot of cash - $1.43 trillion, in fact. It’s an amazing amount. 

Consider this: Factset, a leading provider of financial data, calculates that Corporate America has enough cash to buy all the shares of Berkshire Hathaway, Facebook and Apple, plus still have some left over!

 

What are these companies doing with it?

 

Generally speaking, there are five options when it comes to corporate cash:

  • Pay down debt

  • Buy other companies

  • Pay dividends

  • Buy back shares of your own stock

  • Park it in the bank to earn interest

They aren’t paying down debt because they don’t have any debt. And their cash isn’t in the bank because it pays so little interest. Most companies are either buying other companies, paying dividends, buying back their own shares or some combination of the three.  Last year, U.S. firms spent $903 billion collectively. Some went to dividends ($350 billion), but most went to share buybacks ($500 billion). And estimates indicate it’s only going up, with 2015 spending expected to exceed $1 trillion.

 

So it turns out, Corporate America is the biggest stock buyer around, purchasing more than all individuals combined. That’s concerning. Are all these buybacks inflating prices? Is the historic market rally based on profits and business fundamentals, or financial engineering?

Time will tell. 

 

The truth remains though – no matter how many shares firms repurchase, the health of the business underlying those shares is what really matters. 

 

Are we dealing with solid businesses or a house of cards?

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