So, You’ve Heard Us Companies Are Fabulously Profitable

… and sitting on record piles of cash. It’s true. According to Moody’s Investors Service, non-financial US companies had hoards of cash at the end of 2013 – about $1.64 trillion. That’s about 12 percent more than the previous year’s record-setting $1.46 trillion. Technology, healthcare/ pharmaceutical, consumer product, and energy companies held the most cash.

Why are profits at US companies so high? The Economist offered several possible explanations:

1) Corporate executives favoured capital and not labour in recent years. An expert cited by The Economist suggested, “… had pay kept pace with productivity in recent years, profit margins would be around their historic average, not close to a 50-year high”. 2) When the US dollar loses value, which it has, the foreign earnings of American companies get a lift. And 3) Firms have limited their capital expenditures on equipment, software, and other items. As a result, depreciation charges have fallen making companies look more profitable.

Why aren’t companies spending? It has a lot to do with overseas profits and tax rates, according to The Wall Street Journal’s MoneyBeat. It reported, “Growth in the cash stockpiles, however, came largely from operations overseas. Instead of bringing that money back to the US and paying taxes as high as 35% upon repatriation, companies borrowed money in the US bond market, where interest rates were historically low. The report calls that strategy ‘a form of synthetic cash repatriation’.”

The stark reality is companies are profitable, but they’re also sporting a lot of debt. During the past three years, corporate debt has risen by $3.67 for every $1 of cash growth, according to a report from Standard & Poor’s Rating Services which was cited by The Wall Street Journal. That’s okay when interest rates are low, but may not prove to be so great when interest rates in the United States move higher.

 
 
 

Lexington Wealth Management