Wednesday, December 9, 2020

You might remember that several weeks ago we had a post reviewing the Q3 financial disclosures of nearly 2,500 firms, and one finding was that firms have stockpiled huge amounts of cash to help them weather difficult economic circumstances.

We’ve now taken a deeper look at which firms have been stockpiling the most cash, and how that picture has evolved from one quarter to the next.

Figure 1, below, tells the tale. We examined the cash holdings of roughly 400 non-financial firms in the S&P 500, and tracked total cash reported for that group from the start of 2018 through third-quarter 2020.

The blue bar is total cash for all firms. As you can see, cash was $949.73 billion at the start of 2018, trended downward through much of that year, and then trended back up to $955.7 billion by the end of 2019.

Then comes the pandemic in Q1 2020, and cash holdings soared. They hit a high-water mark of $1.323 trillion over the summer — an increase 38.5 percent in just six months. Total cash edged downward in the third quarter of this year, but not by much. Firms are still sitting on a mountain of money in case economic conditions take a turn for the worse.

OK, that all makes sense so far. Now let’s turn to the orange bar in Figure 1.

The orange bar represents cash among the 10 firms with the most cash in that specific quarter. That bar has fluctuated much less than for all 400-ish firms in total.

You might need to squint to see it, but cash among the Top 10 firms went from a low of $193.3 billion in early 2019, to a pandemic-fueled high of $271.4 billion at the start of this year — and then back to $240 billion in the third quarter. Which is actually lower than Top 10 cash at the start of 2018, when cash for this group was $270.3 billion.

We also wanted to know: How much cash did the Top 10 firms have as a percentage of all cash for the whole 400-firm sample. The results are in Figure 2, below.

As you can see, since the pandemic started, the share of cash going to the Top 10 firms every quarter is declining relative to the whole group. Given what we saw in Figure 1— that the whole group has amassed a huge pile of cash — then Figure 2 has to mean that a small group of large firms (the Top 10) are keeping cash levels roughly constant; but the other 390-ish firms are stockpiling much more.

Why? Presumably because those large firms are confident enough in their operations that they’re not too worried about cash supply — but the vast majority of other firms aren’t as confident, so they’ve salted away a mountain of greenbacks.

We should note that the Top 10 cash-rich firms does vary from one quarter to the next, so it’s not correct to say that only 10 firms qualify as success stories during this pandemic. On the other hand, a select few do keep turning up quarter after quarter: Apple, Amazon, and Google, for example; and a few others. (Mostly tech firms, of course.)

Upon Further Review...

Another way to study this trend would be to look at operating income. We already know from our first study a few weeks ago that operating income in Q3 2020 was lower than the year-ago period. So one possible analysis would be to examine total operating income for the whole group over the last three years (that is, repeat Figure 1, but with operating income rather than cash) and then compare the operating income share for the Top 10 relative to the whole (that is, repeat Figure 2).

If we see a pattern where the largest firms are increasing their share of operating income relative to the whole, then that could explain the cash patterns we see here: other firms are generating less operating income, so they’re amassing cash to preserve their liquidity.

Hmmm. That sounds like a really interesting analysis, now that we think about it. Why don’t you all circle back to us in another few days and see what we found?

P.S. For those interested in getting an Excel file, here it is. Note: You will need the Calcbench Excel Add-In installed in order to populate the data - enjoy!

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