New Greenwich Associates study shows European companies holding lots of cash, dragging down ROE.
European corporates will see smaller gains than expected on their invested cash, which could be big drag on shareholder value, according to consultant Greenwich Associates. As in the US, European companies are finding viable places to put excess cash a significant challenge.
Since the start of the financial crisis, corporations in Europe and the US have built up large cash piles mainly because of sketchy capital markets (since improved) and the fear of banks going out of business. As a result, they’ve been conserving cash. And like their American counterparts, European companies now are sitting on a large amount of cash – about $354bn, according to data from AllianceBernstein. In the US, that level is $1.9tn, according to recent Fed data.
In the Greenwich report, the European Large Corporate Banking Study, FT 500 companies expect to earn an average of only 1.1 percent on their cash investments in 2011. “That level of return would guarantee that the enormous cash positions currently held by large European companies will act as a significant drag on corporate returns on equity this year,” Greenwich said.
What to do with corporations’ growing cash pile has been a subject of several NeuGroup peer group meetings. At the NeuGroup’s fall Treasurers’ Group of 30 (T30) meeting, most members said they planned to increase dividends or buy back stock to enhance shareholder value.
In the Greenwich study, FT 500 companies report that with returns on corporate cash investments being so low for so long, some are “abandoning longer-term liquidity solutions altogether.” In 2008, Greenwich said, 62 percent of these companies were using an external asset manager for short/medium-term investments, but as of 2010 only 47 percent in 2009 did so. That number is expected to have dropped to 46 percent in 2010.
“The opportunities for active managers to add value in the current interest-rate environment are just so minimal that companies are deciding that it’s not worth the cost and effort,” Greenwich said. “As a result, actual returns on cash holdings in 2011 could fall further without a meaningful move in interest rates, placing even more of a drag on ROE.”
Perhaps as a result of this low level of interest and scarce investment opportunities, many cash managers have been piling into risk (see related story here). This should prompt treasurers that still do have their investments managed externally to continually check with those managers to make sure they are staying within stated investment guidelines.