Questions that are rarely asked

by on February 27, 2013 at 10:29 am in Economics | Permalink

If companies are just “sitting on cash,” doesn’t that mean the “procurement multiplier” should be low? Or can you have it both ways?

That is from me on Twitter.

JWatts February 27, 2013 at 11:33 am

What do you mean by the phrase “procurement multiplier”?

Orange14 February 27, 2013 at 11:51 am

+1 Consider the case of Apple who are sitting on all the cash and they spend only about 3% of that amount on R&D during the course of the business year. This company could have ZERO net profit for a lot of years and still continue to fund their own R&D. Now they could also do something dumb and go out and acquire some ‘assets’ the way some other high technology companies have done but there is no guarantee that they will make a successful decision based on history (I don’t think that Tim Cook is the next Warren Buffet). There are two options to entertain: 1) use the money and future cash flows to take the company private and not have to worry about pesky shareholders or 2) return some large portion of the money to the shareholders.

you are posting too soon February 27, 2013 at 11:47 am

Is that assertion really true?
I think I read somewhere, might have been Mish’s blog, that yes companies have record cash on hand but also huge amounts of liabilities which basically cancel out all that cash which supposedly could be spent freely. Could anyone clear this up?

JWatts February 27, 2013 at 11:50 am

That’s certainly not true of Apple.

Michael February 27, 2013 at 2:01 pm

Apple has always had huge amounts of cash and little debt on their books. That is not a good example.

jpa February 28, 2013 at 8:54 am

Always? They were near bankrupt 16 years ago when they took $150m investment from MSFT.

KLO February 27, 2013 at 12:03 pm

The aggregate cash-to-debt ratio of S&P 500 firms has increased dramatically over the past decade from about .27 in 2003 to .41 in 2012. But, as you can see from these ratios, S&P 500 firms have a lot more debt than they have cash. Of course, much of the debt is long-term, so firms do not feel a pressing need to retire it. Moreover, firms now are afraid that credit markets could once again become frozen, and, for that, reason, they are reluctant to use the cash to retire debt early or make capital investments.

Vivian Darkbloom February 27, 2013 at 12:40 pm

One of the best discussions on the topic of corporate cash holdings was recently published by the St Louis Fed. The trend line has been fairly consistent since the early 1990′s:

http://www.stlouisfed.org/publications/re/articles/?id=2314

Shane M February 27, 2013 at 10:12 pm

good link. thank you.

Ray Lopez February 27, 2013 at 12:45 pm

As best I can tell from Googling it, ‘procurement multiplier’ is a neologism that is not really used much. Here is what a company called “Orimax” says in their advert: “In a typical company, procurement and related supply chain costs can account for anywhere between 50 & 70% of revenue. A reduction in procurement spend [sic], even a small reduction can have a large impact on costs and significantly influence profitability. This is called the procurement multiplier effect. “

Geoff Olynyk February 27, 2013 at 3:01 pm

I think Tyler’s talking about how government spending would get multiplied as it moves through the economy. Like the government buys, I don’t know, solar panels for every building, at a cost of $50-billion. Then people claim that that helps the economy to the tune of some multiple of that (say, 3x = $150-billion). The idea is that the solar-panel makers spend the money that they got from the government on R&D, buying new equipment, etc.

But if those companies instead just hoard the cash, then that money never gets re-spent. It just sits in a bank account.

I don’t really see the logic though, because if the solar-panel maker’s margin is 10%, that means they’re automatically re-spending 90% of what they take in from sales. Even if they hoard the 10% instead of spending it on R&D or whatever, that’s a small fraction.

kebko February 27, 2013 at 2:29 pm

The excess cash causes a lot of issues that I don’t see accounted for in analysis. For instance, with Apple, a market cap of $400 billion with earnings of $40 billion looks like a PE of 10, but you could really think of the investment as $300 billion in a tech firm with earnings of $40b and a PE ratio of 7.5 plus $100 billion in cash equivalents. As long as we have these big tech firms sitting on piles of cash, I think PE ratios are overstated.

JB February 27, 2013 at 10:42 pm

I would argue that making dividends corporate expenses (e.g. deductible like employee salaries) and making dividend income taxable as regular income just like interest would result in more cash being distributed to shareholders. Salaries and bonuses are already expenses, why not dividends? It seems like this would be a positive for the economy and tax receipts.

Givco February 28, 2013 at 12:05 am

You mean like most Of the British Commonwealth (what they call “franked” dividends)?

But we prefer a high tax/low govt service society.

Floccina February 28, 2013 at 11:40 am

+1

Vivian Darkbloom February 28, 2013 at 12:00 pm

“You mean like most Of the British Commonwealth (what they call “franked” dividends)?”

The UK and some of the other Commonwealth countries such as Australia follow a (partial) “imputation system”. Dividends paid by corporations are not deductible from corporate income. Rather, the dividend carries with it a tax credit claimable against personal income tax by the dividend recipient. This is designed to offset at least part of the corporate income tax and therefore at least partially offset the double corporate and individual level tax. For example, in the UK a dividend of $90 would be grossed up to $100 and the recipient taxed on $100 and entitled to a credit of $10 (obviously sterling). The fact that the dividend distribution is not deductible for corporate income tax purposes renders, I think, a slightly lower incentive to distribute than if the dividend would be deductible.

A system that allowed corporations to deduct dividends distributed from their income would rather represent the existing tax regime in the US for Real Estate Investment Trusts (REIT’s). They are required to distribute 90 percent of income. If they don’t, they suffer corporate level tax on the undistributed earnings.

Jerry Shown February 27, 2013 at 10:46 pm

That’s at least twice recently you’ve been your own source for a “question rarely asked.” Is this a new trend?

steve February 28, 2013 at 4:01 pm

Our real economic problem is that millions of unemployed are just sitting on their labor rather than putting it to good use. The government should be working on ways to penalize these hoarders.

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