Flush With Cash

Alliance Bernstein economist Joe Carson's March letter notes that U.S. non-financial corporations' total holdings of liquid assets are 1.8x the dollar value of their fixed investments and that they have not held this level of cash relative to investment at any time in the past fifty years. At the end of 2009, using Federal Reserve Board numbers and estimates from Haver Analytics, Carson notes that the cash and liquid assets total $1.8 trillion.

The cash hoard was a natural consequence of the response to the financial crisis: slashing payrolls and operating expenses, reducing inventory investment, and deferring capital spending. The question is what to do next?

Conoco Phillips recently made a clear, informative presentation about its medium term strategy to improve operating performance, raise return on capital employed, and create shareholder value. To this end, they announced goals for dividend growth and a share buyback program, some of which would be funded by redeployment of cash from asset sales, specifically the sale of a 10% stake in Russian energy company LUKOIL. Additional free cash flows generated by the multi year strategy would go to retiring debt. It's a thoughtful approach.

A friend who is a mutual fund manager mentioned to me that Medtronic had indicated to analysts that up to 40% of future free cash flows would be dedicated to returning funds to shareholders, again through a combination of dividend growth and share repurchases.

It will be interesting to follow this stream of cash in the coming months, to see if there is a rebound in capital spending, which would then put some economic foundation under the market valuation.