Sitting on cash? Don’t be a bad Apple!
I once took a tour of a local apple orchard here in Minnesota and learned that apples can be kept “fresh” for up to 12 months when placed in a cold, low oxygen environment known as Controlled Atmosphere (CA) storage. This practice is widespread in the fruit industry and is in large part what keeps our grocery stores stocked with fresh fruit throughout the year.
Alas, the refrigerator in my basement apparently does not work on the same principles.
Opening that fridge the other day for the first time in quite a while, I was greeted by a rather pungent odor emitted by what I can only describe as shriveled alien heads wrapped in colorful wooly scarves. At least that’s what the apples and peaches purchased months before appeared to have transformed into!
At the risk of torturing this analogy, there has been a lot of news in the past week about a slightly more famous Apple that has let the fruit of its labors sit in storage so long that it is starting to cause a stink. With around $137 Billion in cash sitting on its balance sheet, Apple is a poster child for the new reality of large corporations holding on to truckloads of cash, and not doing anything with it to give shareholders return beyond keeping it safe in a bank vault. And late last week hedge fund investor David Einhorn, initiated a lawsuit designed to force Apple to take some of their cash out of storage and use it in the form of a new type of dividend bearing stock.
In a Wall Street Journal article about this, it is clear this is just the latest manifestation of a now “…old problem, that of cash-heavy companies. U.S. companies have been retaining unusually large amounts of cash since 2008, in part because … the slow economy has made it hard to find profitable new investments. But … shareholder pressure is growing to put that cash to work.”
Clearly, shareholders are starting to smell something rotten…the rotten return on cash sitting idle in a historically low interest rate environment!
With shareholders on the one hand decrying the lack of return on idle cash, and CFOs and Treasurers on the other hand wanting to keep enough cash around to handle any unexpected swings in the economy, what can a company do to combat this conundrum?
As part of the solution, a growing number of companies are deploying some of their cash to invest in their own supply chains through a B2B network enabled practice called Dynamic Discounting. With a dynamic discounting platform, these companies can collaborate automatically with their suppliers to provide accelerated cash flow to their supply chain while earning significantly better yield on their cash than they are getting from the bank.
With all the investor pressure, companies must at some point begin to draw down their cash stores through options like dividends to shareholders, stock buy-backs, capital investments, acquisitions and the like. But given the painful lessons of the Great Recession, my money is on companies keeping a still large amount of cash on hand for the foreseeable future…just in case.
If they do, I hope they learn from those who have realized the benefits of dynamic discounting and put some of that cash to work earning something for their shareholders. Otherwise, with interest rates not going anywhere for at least a couple more years, it will just continue to sit there earning rotten returns.
And nobody likes a bad Apple.