What To Do With All That Cash?

June 05, 2013

This week’s chart of the week examines the cash holdings of companies in the S&P 500 following the recession. Since 2007, the cash per share for the S&P 500 index has risen to $329.01 for a compounded annual growth rate of 11.5%. This was the result of companies protecting themselves against another economic downturn, but as the S&P 500 has hit record highs, cash and other short-term investments have continued to grow.

Investors often view high levels of cash as a sign of inefficiency. If companies have no favorable projects to invest their cash in, it should be returned to the shareholders. The most apparent instance of this was when shareholder activists began demanding Apple (AAPL) pay out some of its cash to investors. While Apple has announced it will return $100 billion to shareholders, it partially financed this buyback with debt to avoid taxes on its overseas cash. Although these high levels of cash are often viewed negatively, it could provide investors with opportunity if and when businesses decide to use these holdings. In addition to being paid out to shareholders, this cash could be reinvested in the firm or used to make new acquisitions, both theoretically leading to increased growth for the company. However, issues such as Apple’s international taxation may continue to discourage businesses from dispersing these positions. Furthermore, holding high amounts of cash may be the new norm as companies look to avoid liquidity problems during any decline the economy might face.