Cash concerns rippling lakes of even bluest of blue chips

Credit raters and analysts want to see more cash conserved. Shareholders want their dividends. Yikes.
By Tim Catts
February 9, 2009 12:01 AM ET

(Bloomberg) Companies have been bulking up their cash holdings since the credit crisis hit a year and a half ago, hoping to shield their companies from tight credit conditions. But in the current environment, it seems that no amount of capital backup is enough.

According to data compiled by Standard & Poor’s, non-financial companies included in the S&P 500 have increased the cash on their balance sheets since the turmoil in the credit markets began a year-and-a-half ago.

At the end of the third quarter in 2008—the most recent period for which the data, drawn from corporate filings with the Securities and Exchange Commission, was available—such holdings reached $647.8 billion, up 7% from the spring of 2007.

All told, cash holdings of these non-financials now total more than 45% of the companies’ long-term debt. That’s the highest proportion since at least 1980, according to S&P.

But all that cash is not settling nerves on Wall Street or Main Street.

Case in point: General Electric, long seen as a financial management leader, reported earlier this month that it had amassed $48 billion in cash and equivalents. That has not quieted fears, however, that it may not be able to maintain its sterling credit rating.

Moody’s Investor Services last month put G.E. on review for possible downgrade of its “Aaa” rating, the highest possible, citing fears that its industrial operations won’t generate enough cash without a bigger contribution from its beleaguered financing arm. Earnings there have been decimated by poorly performing loans.

G.E. said in December that it expects to generate some $16 billion in cash in 2009 after capital expenses, mostly from its industrial units with a relatively modest contribution from G.E. Capital.

What’s more, some analysts believe—despite GE’s pile of cash—that it won’t be able to maintain its dividend as is. “Given the rapid deterioration in the fundamentals of the financial services businesses along with a slowing of activity on the industrial front, consolidated cash flow will moderate and we would not be surprised if the company’s dividend payout is adjusted downward to reflect the weakening earnings profile,” wrote Hitin Anand of independent credit rater CreditSights in a note to clients.
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