Large companies holding on to their money

They're hoarding cash rather than hiring new workers or buying new equipment. But there are signs that may be changing at least a little.

Last week, a panel of renowned economists declared that the longest recession since World War II officially ended more than a year ago. But you wouldn't know it by looking at the cash-rich balance sheets of Minnesota corporations.

Despite a sporadic global recovery, companies are hoarding cash like it's still September 2008, when corporate America started burrowing away huge sums to protect itself against a fast-spreading financial panic.

All told, Minnesota's roughly 100 significant public companies are sitting on $139 billion in cash, about 20 percent more than at the beginning of the recession. That's enough cash to pay 772,000 Minnesotans $60,000-a-year salaries for the next three years.

The giant cash hoard suggests that corporate CEOs and their boards remain deeply pessimistic about the strength of the recovery, say economists. In many cases, they would rather earn next-to-nothing on their savings than hire more people or invest in new equipment or products.

Some large Minnesota companies, including 3M Co., Medtronic Inc., Fastenal Co. and Hormel Foods Corp., have more than doubled their cash holdings over the past two years.

"Americans feel poorer, which makes it very difficult for corporations to feel optimistic about spending," said Jeanne Boeh, chair of the Economics Department at Augsburg College in Minneapolis. "If I'm not going to be selling more stuff, then why would I bother to hire more people or buy more equipment?"

Nationally, the cash piles held by the nation's largest companies have reached staggering levels. Non-financial companies in the Standard & Poor's 500 index were holding a record $842 billion in cash as of June 30, up from $603 billion three years earlier.

For some company executives, the memory of the fall of 2008 still looms large. For a brief while, the commercial paper market nearly dried up and companies that rely on the short-term financing faced a cash crunch. "It's human nature," said Mark Henneman, a money manager with St. Paul-based Mairs & Power. "You've just been through a major crisis, and suddenly having all that cash becomes a wonderful thing."

Starting to spend

Yet, despite the fear and gloom, there are signs that some large, cash-rich Minnesota companies are starting to loosen their purse strings after two or more years of downsizing.

3M Co. is among them. In 2007, just as the economy started to collapse, the Maplewood-based industrial conglomerate, which makes everything from asthma inhalers and masking tape to Post-it notes, began a severe round of cost cuts. The company closed plants, eliminated more than 4,000 jobs, slashed capital expenditures by 35 percent, got rid of free lunches, and banned merit pay increases across the company, including for CEO George Buckley.

The cost cuts helped 3M amass $4.9 billion in cash as of June 30, and investments that can quickly be turned into cash, up from $2.97 billion a year earlier.

With that war chest, 3M has returned to the acquisition trail, announcing three acquisitions in less than a month. 3M will dip into its cash to buy Cogent, a California maker of fingerprint-identification systems; Attenti Holdings SA, an Israeli company that makes products like ankle bracelets used to track people; and Arizant Inc., an Eden Prairie maker of blankets designed to prevent hypothermia in surgical patients. Together, the deals will cost almost $2 billion.

The slew of 3M acquisitions is a reminder that corporate America's cash hoard is a "huge untapped potential," said Harrison Grodnick, senior portfolio manager at Minneapolis Portfolio Group, which owns about 500,000 shares of 3M stock. "All that cash on the sidelines has to be put to work eventually, and then it's going to add fuel to the fire of a recovering economy."

Other companies have starved spending for so long that, with even a small uptick in sales, they are rushing out to upgrade their plants and equipment.

Donaldson Co., a Bloomington-based maker of air and liquid filters for diesel equipment and industrial applications, cut spending so severely during the recession that its cash holdings have tripled since the second quarter of 2008. But this spring and summer, as demand for trucks and heavy equipment picked up again, the company decided it was time to dip into those cash reserves and increase its capital spending from $40 million to $75 million, back to pre-recession levels.

"To start the growth engines again, we really needed to start investing back in the business," said Rich Sheffer, assistant treasurer and director of investor relations at Donaldson. "We're gaining confidence that our businesses either have recovered or are close to recovering."

Polaris Industries Inc. of Medina is another company looking to put its cash stash to work. Eighteen months ago, the company halted its stock buybacks when sales of its snowmobiles and all-terrain vehicles began to sputter. The move caused its cash holdings to swell from $30 million to $166 million as of the second quarter.

Now, Polaris intends to use its large stockpile of cash to make strategic acquisitions that would expand its global presence and diversify its product mix. "We have a pretty active funnel of potential [acquisition] targets, and we're moving through that funnel," said Richard Edwards, director of investor relations for Polaris. The company recently announced plans to close a parts plant in Osceola, Wis., and move production there to Mexico.

Low risk, low return

Indeed, at a time of ultra-low interest rates, a number of companies are beginning to question the merits of holding so much cash. Stung by losses on bonds backed by mortgages and other securities, companies have been playing it safe with their investments. A lot of their cash is in certificates of deposit and short-term Treasury bills with annual yields of less than 1 percent.

It's the corporate equivalent of sticking money under the mattress. And company boards are under pressure to return some of that money to shareholders, in the form of dividends or stock buybacks, rather than let it sit in bank CDs.

Last week, Microsoft Corp. created a stir when it announced plans to raise its quarterly dividend for the first time in two years, a move that will return $37 billion to its shareholders. And computer networking titan Cisco Systems Inc., which has $40 billion in cash, also surprised Wall Street by announcing that it expects to start paying a dividend for the first time.

In Minnesota, cash-rich UnitedHealth Group of Minnetonka upped its annual dividend earlier this year to 50 cents a share, from 3 cents before. Target hiked its quarterly dividend to 25 cents a share, up from 17 cents.

However, the reality is that many companies are still sitting on bucketfuls of money, waiting for strong evidence that the economy won't take another downward turn.

Though some big dividend and buyback announcements have grabbed headlines, companies are still being decidedly stingy with their cash. In the second quarter, companies in the S&P 500 returned $128 billion to shareholders in the form of stock buybacks and dividends, down 40 percent from $217 billion three years ago.

For every 3M or Microsoft, there are many more companies like Select Comfort Corp. The Plymouth-based maker and retailer of mattresses went from nearly bankrupt two years ago to amassing $39.9 million in cash and equivalents, largely by closing stores, cutting its corporate staff and issuing more stock.

However, until consumers start spending more, the company is better off keeping its money in the bank, said John Baugh, an analyst who follows the company for Stifel Nicolaus in St. Louis. "How anxious are consumers to go out and buy an expensive mattress?" he asked. "They're a little more anxious now than in the depths of 2008 and 2009, but not enough to give this company a reason to go out and blow its cash."

Fears of a double-dip recession persist, in part because unemployment remains stubbornly high and personal household wealth remains weak. The Federal Reserve reported last week that household net worth -- including stocks, bonds, homes and other investments, minus debts -- fell 2.8 percent in the second quarter, the first decline since early 2009.

"It's a chicken and egg problem," said Christopher Dvorak, president of Dvorak Technical Research, a Minneapolis-based equity research firm. "If there was a demand for products, companies would hire employees to fill that demand. And because they're not hiring, there's not enough demand."

Chris Serres • 612-673-4308

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