Companies cope with too much cash

By Matt Krantz, USA TODAY

With corporate profits soaring and coffers overflowing again, companies have a new kind of cash problem: what to do with all of it.

That’s a bigger issue than it may seem for companies ranging from Lehman Bros. (LEH) to Microsoft (MSFT) and ExxonMobil (XOM). The cash surge has already sparked a comeback in mergers and stock buybacks and a boom in dividends.

It’s a good problem to have, but it’s easy to flub this one, says Francois Mallette of L.E.K. Consulting. When your pockets are filled, it spills out. and you can do stuff that may destroy value.

Cash balances at the 372 industrial companies in the Standard & Poor’s 500 index climbed 21% last year, S&P says. That’s the biggest increase since the economic peak in 2000, when cash jumped 26%.

Usually companies would use cash to upgrade facilities or expand plants. But they’re reluctant to do so now because most industries already have too much capacity, says Warren Batts, professor of finance at the University of Chicago. That’s causing some investors to worry firms will hoard the cash and earn 1% interest. The dumbest thing to do is sit on too much cash, says Bryant Riley, CEO of research firm B. Riley. It’s not a good return on shareholders’ capital.

Hoping to quell these fears, companies are making big decisions now on what to do with their cash:

Lehman. Cash at the brokerage soared $2.9 billion, or 147% last fiscal year, to $4.9 billion. As a result, Lehman boosted its dividend 33% and said it will buy back more stock, giving existing shareholders a bigger piece of future earnings. It also paid CEO Richard Fuld a cash bonus of $6.7 million, a sixfold increase from 2002. The company had no comment.

Freeport-McMoRan Copper & Gold. The mining company’s cash jumped 5,817% to $464 million at the end of last year, the biggest cash gain among the S&P 500, Multex Investor says. A 65% increase in copper prices and an 8% rise in gold prices allowed it to generate so much cash. The company has also used its cash to buy back stock, pay down debt as well as begin paying a dividend in early 2003. But it still had so much cash it raised the dividend in October 2003.

ExxonMobil. Strong earnings drove its cash balance up 47% at the end of 2003 to $10.6 billion. That’s even after investing $15.5 billion on upgrading facilities. The company also boosted its dividend 9% last year and increased its stock-buyback program.

Microsoft. With a mounting stash of $53 billion, Microsoft will tell investors before July what it plans to do with it, CFO John Connors says.

Investors will be patient with companies for a little while, says Don DePamphilis, professor of finance at Loyola Marymount. (But) if a company has too much cash, they are not showing creativity in how they can invest it. And investors will want it back.