Non-financial companies continue to accumulate cash at a robust pace, driven mostly by increased borrowings, according to a report from Moody’s Investor Services. Technology as it has for some time leads all sectors in the amount of cash holdings, accounting for five of the most cash-rich non-financial companies. In fact, tech cash holdings continue to grow even as other sectors start to flag.
“Aggregate cash holdings in the technology sector grew 13% in 2015, making it the only major sector where cash levels increased during the year,” Moody’s said. “This marks the technology sector’s eighth consecutive yearly increase. By contrast, each of the next five sectors experienced cash declines in 2015, with manufacturing suffering the steepest decline with a 17% drop.”
According Moody’s rising debt levels continue to fuel growth in corporate cash holdings; in fact, excluding cash generated from debt, total cash for non-financial companies decreased in each of the last six years.
In tech, activists for several years have been agitating for companies to distribute their surfeit of cash back to shareholders via buybacks, dividends or mergers. For the most part, tech companies have been in a merger mood. In fact, it was a banner year for technology M&A in 2015, with volume up a whopping 94% over the year before, according to data from Bank of America Merrill Lynch. And 2016 is looking almost as good, according to the bank. This spike in volume is a good indication of why M&A is among the top five priorities in 2016 for treasurers in The NeuGroup peer group universe. One of the reasons for the M&A growth is due to positive sentiment, BAML said. This is giving rise to very large deals, according to BAML, which also notes that pre-funding and flexibility are current themes that are helping spur M&A deals.
When it comes to share buybacks, companies are doing less of it, according to Moody’s. Share repurchases declined by 7% to $269 billion in 2015, after having reached an all-time high of $288 billion in 2014. Again, tech was the leading sector in this regard, buying back $118 billion in common stock last year, which represented 44% of total nonfinancial buybacks, Moody’s said. Dividends continue to stay strong, particularly among tech firms. “Companies in aggregate paid out 103% of discretionary cash flow, exceeding 100% for the second consecutive year,” Moody’s wrote. “We expect total returns to shareholders to remain strong in 2016, with a payout reaching about 100% of discretionary cash flow. We expect dividends to represent about 60% of total shareholder returns.”
Despite the strength of 2015, Moody’s expects dividending and share buybacks to sink somewhat in 2016 “due to uncertain economic conditions.”