FTSE 100 net cash piles soar as firms find few opportunities to invest
· FTSE 100 net cash holdings rise 41% last year, as recession-hardened firms remain cautious · Net cash reaches £53.5bn rising £15.6bn year on year · Companies reduce short-term debt by 18%, and long-term borrowing by 2% · Debt repayments far outstrip increases in dividends and business investment, suggesting that investment options are limited for cash laden companies · Mining sector continues to amass the cash, while oil and gas greatly diminish stockpile · Consumer goods industry cuts short term borrowing by 22% and long-term debt by 14%The net amount of cash held by FTSE 100 companies has soared by two fifths over the last year, according to new research by financial administration experts, Capita Asset Services, part of Capita plc.
Analysis of the balance sheets of FTSE 100 companies (excluding financials such as banks) shows net cash positions, the balance after short-term debt has been subtracted, have soared as companies continue to repay their borrowings. The net cash position of FTSE 100 firms has increased by 41% over the last 12 months, climbing to £53.5bn - a rise of £15.6bn from £37.9bn in 2013. Back in 2008, just before the global recession hit, this net cash figure was £12.2bn.
Companies have paid down £18.1bn of short-term debt in the last year, bringing such borrowing by the FTSE 100 down by 18% to £84.5bn. Long term debt is lower too. It has dropped 8.2bn to £346bn (down 2%).
Having grown strongly since the recession, gross cash, that’s cash before taking short-term debt into account, has dipped by 2% over the year to £138bn, suggesting companies are increasingly relaxed about their financing options. However by continuing to pay down these relatively modest borrowings, FTSE 100 firms have now improved their average net cash position from £463m in 2013 to £652m in 2014.
At a sector level, mining companies have improved their net cash position the most, by £11bn year on year, while oil and gas companies have seen their net cash balance fall by £8bn, more than any other sector. Both food producers (£7.4bn) and mobile and telecoms companies (£6.7bn) have also seen net cash positions improve significantly, though the latter is exclusively down to Vodafone, where the sale of Verizon caused its gross cash pile to grow by £2.6bn, and its short term debt to shrink by £4bn.
In total, 19 sectors have seen net cash balances climb over the year, compared to 14 that have seen them fall. This is due in part to the fact that 18 sectors were able to shrink their short term debt, while 15 saw borrowing increase over the period.
At the broader industry-wide level, consumer goods companies have seen a dramatic uplift in their net cash position, which has increased £7.3bn over the year. These companies increased their gross cash piles by 6% and reduced short-term borrowing by a fifth (22%), perhaps a direct consequence of strength in consumer spending. The industry was dwarfed only by basic materials (£11.3bn increase) and telecommunications (£9.5bn increase) which were fueled by mining and the Verizon sale respectively.
Justin Damer, Commercial Director of Capita Asset Services, comments: “Companies are still running extremely conservative balance sheets. Even though they have reduced huge gross cash balances fractionally, suggesting the memory of the credit squeeze is receding further, a sharp rise in net cash, combined with a small drop in long term debt, demonstrates a desire to keep borrowing levels low, and a lack of alternative uses for their shareholders’ money. Dividends of £70bn, more if you include Vodafone’s special payout, have barely dented annual cash flows, and investment, though it is rising, is still not at levels where big firms need to borrow.
“Continuing to hoard cash, even as the economy has gone up through the gears, will prove unpopular with investors, who resent companies sitting on huge cash piles earning low returns. Efficient and effective treasury administration will be crucial in maximising the returns these relatively unproductive assets tend to provide to mitigate the drag cash puts on a company’s overall ROE – especially in the context of the sums FTSE 100 companies are dealing with.”
If companies were to return their gross cash piles to shareholders completely in 2014, the forecast payout from FTSE 100 companies for the year would more than double, according to analysis of Capita Asset Services’ UK Dividend Monitor. The overall payout would be £236.5bn, more than twice the £98.5bn forecast for this year.