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Coronavirus Shows Cash Is King, Even for Biggest U.S. Companies

Thursday 26th March 2020

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Pandemic is hitting nearly every business, but not all of them were equally prepared for the sudden economic slowdown 

The fast-spreading coronavirus has prompted even the biggest U.S. companies to cut their spending and bolster their balance sheets, proving once again how cash is king, especially in times of crisis.

After a decade long U.S. economic expansion, not every company has entered this crisis with the same cash cushion. Apple Inc. ended the year with $247 billion in cash, securities and account receivables, enough to run its operations for more than a year even if it didn’t cut costs or sell a single iPhone. Discount retailer Dollar General Corp. had $240 million, enough for about four days, in the unlikely event it had to shut its doors and didn’t cut any costs.

Dollar General said its business model generates significant cash flow and has performed well in a variety of economic cycles, and the company can tap lines of credit and good access to the capital markets. Apple declined to comment.

Technology companies generally operate with more cash on hand than retailers, which often have assets in unsold inventory. The median amount of cash and other readily available assets on an S&P 500 tech company’s books at year-end was enough to let it operate about 270 days in an extreme scenario without revenue or cost cutting, while the median was closer to 60 days for retailers, according to a Wall Street Journal analysis.

Cash Burn Estimated number of days select S&P 500 retailers could operate without new sales or cutting costs. 

Most have recently taken steps to bolster their liquidity. Source: Calc bench Note: Calculated by dividing cash, securities and accounts receivable at the end of 2019 by total operating expenses for the prior 12 months, excluding depreciation and amortization, stock compensation and common write-downs.

As companies prepare to close their books on a tumultuous first quarter, these measures can reveal how well-prepared they are for the sudden financial stress. Economists expect the crisis to cost the U.S. economy as much as $1.5 trillion in lost output over five years, including a decline in gross domestic product of 4% to 10% in the second quarter, a recent Journal survey of economists found.

“The investor mindset has shifted quickly to the balance sheet,” said Ron Graziano, an accounting and tax analyst at Credit Suisse. Sometimes factors that people don’t follow during a booming market suddenly become important. “The ones going into it with the bigger cushion are better positioned to survive.”

Delta Air Lines Inc. and Ford Motor Co. have stopped paying dividends. Boeing Co. has tapped out its credit lines, while General Electric Co. is cutting jobs. AT&T Inc., Intel Corp. and Chevron Corp. have shelved share buybacks.

In many cases, the crunch on corporate finances comes after years of cheap debt and easy credit that allowed companies to expand while building a $10 trillion mountain of debt. AT&T, following its 2018 takeover of Time Warner, had more than $150 billion in net debt at the end of 2019, though it has pledged to pay down its borrowings. 

At the same time, many companies used spare cash to repurchase their own shares. In 2019, companies in the S&P 500 spent an estimated $729 billion on buybacks, second only to the record $806 billion spent in 2018, according to S&P Dow Jones Indices.

President Trump and Democratic lawmakers placed restrictions on share buybacks as part of the $2 trillion coronavirus stimulus package expected to pass Wednesday to help industries wounded by the pandemic. 

Cardinal Health Inc., which distributes medications and medical supplies, had total liabilities of $40 billion at the end of December, including $5.6 billion related to a proposed settlement of state opioid litigation. That amounted to 40 times its shareholders’ equity, a common measure of the degree to which a company’s assets exceed its liabilities.

Debtors List Debt-to-equity ratios at the end of 2019 for select S&P 500 manufacturers Source: Calcbench

By contrast, the median debt-to-equity ratio for the health-care companies in the S&P 500 was 1.2, according to a Wall Street Journal analysis of S&P 500 financial data provided by Calcbench. A spokeswoman for Cardinal Health had no immediate comment.

Kimberly-Clark Corp., which makes Huggies diapers, Kleenex tissue and other consumer products, reported liabilities 77 times the size of its shareholders’ equity at the end of 2019, the Journal analysis found. The ratio for competitor Procter & Gamble Co. was 1.4. Kimberly-Clark didn’t respond to requests for comment, and P&G had no comment.

Traditional debt-to-equity ratios probably understate the debt burden many companies carry, Columbia University accounting professor Shivaram Rajgopal said. That is because the assets of big companies are increasingly intangible or difficult to monetize, such as goodwill generated from mergers or intellectual property. “In a crisis, that goes up in smoke,” Prof. Rajgopal said.

Sources: WSJ Article


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