When financial data is released pertaining to the financial health of corporate America, it will often be said that “corporate America is awash with almost $2 trillion in cash.” That statement is true, but it is important to realize that there is nothing like an even distribution of this cash wealth.
In fact, over $1 trillion in corporate America’s cash is held in the following companies: Apple, Microsoft, Berkshire Hathaway, JP Morgan, Wells Fargo, Cisco, Alphabet, Oracle, Amgen, Gilead Sciences, General Electric, Qualcomm, Coca-Cola, PepsiCo, Facebook, Procter & Gamble, Intel, Amazon, Bristol-Myers Squibb, Caterpillar, Franklin Resources, Visa, Celgene, Nike, Wal-Mart, and Adobe.
For the past ten to fifteen years, the cash and debt on a company’s balance sheet hasn’t seemed to matter.
It is important to note that this is a function of interest rates. Right now, “America, Inc.” produces $22 trillion in goods and services while carrying on $75 trillion in debt to do so. In other words, each percentage point paid in interest (i.e. 100 basis points in debt parlance) adds a cost of doing business of $720 billion to America’s corporate debt.
If we woke up in Voelcker-era America tomorrow and interest rates were suddenly 11%, there would be almost $7 trillion in debt that corporate America would have to service (i.e. a third of our country’s economic activity would be burdened by debt satisfaction).
When interest rates are higher, people will have to start caring again about the balance sheet of their various investees. If T-bill interest rates were 6%, Berkshire Hathaway would collect almost $7 billion in net income from its cash balance. In a sense, Berkshire’s cash balance would be one of the fifty highest-earning “companies” in corporate America.
Over really long periods of time, a small minority of companies in a minority share of sectors end up creating nearly all of the stock market wealth. If the 27 companies mentioned above were never included in the S&P 500 at all and the current components were enlarged to fill their share, the S&P 500 index would have only delivered 4.5% annual returns since 1990.
Twelve of those companies (Microsoft, Cisco, Coca-Cola, PepsiCo, Procter & Gamble, Berkshire Hathaway, General Electric, Franklin Resources, Nike, Oracle, Wal-Mart, and Visa) were among the top forty in cash holders back in 2000. That alone is a strong filter of dominant companies for investment consideration. Not only will those companies not become disappointments when interest rates rise, but they are sitting on cash so their net income will actually increase disproportionately while the financial media is lamenting what rising interest rates are doing to stock prices.