Last month, President Barack Obama summoned corporate bosses to the White House. On the agenda: how to get U.S. companies to use their nearly $2 trillion in cash to create jobs.
Among those in attendance was David Cote, who heads Morris Township, N.J.-based conglomerate Honeywell International Inc., which was sitting on $2.6 billion in cash at the end of the third quarter — $811 million more than the company had at the end of 2007, when the recession began.
“We’ve actually already started hiring. If you take a look at about the last six months, we’ve been a net hirer in the U.S,” Cote told CNN after the White House meeting, offering no specifics.
While unemployment remains near 10 percent, corporate cash-hoarding has hit a record high, according to the Federal Reserve. American companies had $1.9 trillion of cash on their balance sheets in the third quarter, up from $1.5 trillion in 2007.
The record cash stockpiling is rooted in the 2008 financial crisis, when borrowing money became tough and companies — much like consumers — tightened their purse strings. Now, some companies find themselves urged to spend that money to help the economy but wary of diving in before a firm recovery is under way.
Companies have used some of their cash to invest in their businesses (such as capital expenditures for new equipment), returning cash to investors (though buying back stock or paying out dividends) or acquiring other businesses.
Medco Health Solutions Inc. has done each of those. The Franklin Lakes, N.J.-based pharmacy benefits manager had $774 million in cash at the end of 2007, and its reserves swelled to $2.5 billion by the end of 2009.
“When the financial crisis hit, it was very difficult to borrow from banks and it was very difficult to issue bonds. It was a very, very tight liquidity market,” said Rich Rubino, Medco’s chief financial officer.
Medco was on track to repurchase about $3 billion in stock last year and plans to repurchase $2 billion worth this year, Rubino said.
Medco also invested $300 million in capital expenditures last year and plans to spend $325 million this year, Rubino said. In September, Medco paid $730 million to acquire United BioSource Corp.
At least one capital expenditure won’t lead directly to much increased payroll — a prescription-filling facility in Indiana that relies not on people, but robots.
By the third quarter, Medco’s cash levels receded to $892 million.
Companies may not need to hire to grow, Rubino noted. “You might not have to because you make corresponding investments in technology that bring you the profitability without adding heads,” he said. “That’s just the way it works.”
(Since 2007, Medco’s payroll has grown, however, from 19,900 full-time employees to 23,000 in 2010, according to the company.)
The recession officially ended in June 2009, yet strong economic growth has remained elusive. Corporate profits have surged, but consumers are also saving more and paying down debt.
Companies appear reluctant to significantly expand their businesses because consumer spending has yet to roar back, said Alexandre Olbrecht, a professor of economics at Ramapo College in Mahwah, N.J.
“They need people to buy their products,” Olbrecht said.
That poses something of a Catch-22. Companies could provide the jobs unemployed consumers need for money, which they theoretically would spend on companies’ products and services.
“They’re going to add payroll … when they feel like their business is going to support those jobs,” Olbrecht added.
Honeywell’s Cote offered no specifics on his company’s plan to hire, and a company spokesman declined to say how many workers the company might hire and when.
“Honeywell’s cash deployment plans include making continued investments in its business globally, research and development, increased dividends, and for acquisitions that support business growth,” the spokesman said in a statement.
Johnson & Johnson, which a spokesman said has about 114,000 employees worldwide, down from 120,000 in the third quarter of 2007, declined to comment.
Verizon also declined to comment, and Merck did not respond to requests for comment.
Looking at companies’ cash reserves in late 2007 also may not tell the full story.
The Children’s Place, for example, had unusually low cash levels in 2006 and 2007 because the retailer was using its cash for “an onerous store remodeling schedule” for Disney stores (a line it has abandoned), spokeswoman Jane Singer said.
Children’s Place has bought back stock the past two years and also opened new stores. It plans to open 85 new locations this year, Singer said.
Meanwhile, Hertz Global Holdings Inc., the car and equipment rental firm, has an unusually large amount of cash on its books — $1.5 billion.
That’s mainly because the company plans to pay $700 million to retire bonds this month, spokesman Rich Broome said. But the company also has become more conservative because of the financial crisis’ shock.
“The capital markets were closed to a lot of companies, and that’s a scary situation for a capital-intensive company — any company — every company needs financing,” he said.
Broome said Hertz’s workforce has shrunk by about 25 percent since the end of 2007, when the company reported employing 29,350 workers.
“You just don’t need the people if you don’t have the business,” he said. “It’s been coming back, but it’s not where it was in 2007.”
Source: McClatchy-Tribune Information Services.