2014 Cash Update: Corporate

America's Richest 1% Keep Getting

Richer
Primary Credit Analyst:
Andrew Chang, San Francisco (1) 415-371-5043; andrew.chang@standardandpoors.com
Secondary Contact:
David C Tesher, New York (1) 212-438-2618; david.tesher@standardandpoors.com
Contributor:
Ka-Kin Leung, Research Contributor, San Francisco
Table Of Contents
Corporate Wealth Is Concentrated In Relatively Few Hands
The Cash To Assets Ratio Gap Is Widening
The Growing Wealth Gap Is Due To Unrepatriated Overseas Cash . . .
. . . Resulting In A Domestic Cash Shortfall Near $100 Billion
Domestic Cash Shortfall Is Offset Through Synthetic Cash Repatriation
Higher Debt Has Not Hurt The Top 1%'s Credit Profiles
The Rich Will Continue To Get Richer
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2014 Cash Update: Corporate America's Richest
1% Keep Getting Richer
Much has been written recently about the growth of income inequality in America: that the top 1% of the richest
Americans control somewhere between 35% and 40% of the nation's wealth and that this wealth inequality has
widened since the start of the Great Recession. While most of the discussion has been about individuals and
households, a similar wealth gap has developed between the top 1% and the remaining 99% of U.S. corporations.
Standard & Poor's Ratings Services' analysis has found that, out of a record $1.53 trillion in cash and short-term
investments held by U.S. nonfinancial corporations we rate (about 1,800 issuers) as of year-end 2013, the wealthiest
1% (18 issuers) held 36%, or about $535 billion, of total cash, an increase from the 27% they held five years ago. The
top 1% comprises mostly strong investment grade ('A' and higher) issuers, primarily in the technology and health care
industries. Further, the wealthiest top 20% held 89% of total cash, leaving only 11% of cash for the bottom 80% of our
corporate rated universe (see "2014 Cash Update: Cheap Debt Fuels Record Cash Growth," published April 14, 2014
on RatingsDirect for further analysis of overall cash growth in the U.S.).
Overview
Wealth distribution among U.S. corporations is becoming ever more concentrated, with the top 1% controlling
36% of the overall cash and short-term investments versus 27% five years ago.
We attribute the growing wealth gap to rising overseas cash balances, which remain unrepatriated due to U.S.
tax consequences, and strong credit markets, which have enabled the top 1% to "synthetically repatriate" the
cash through cheap debt in order to make up a domestic cash shortfall as high as $100 billion.
Despite the higher debt, the credit profiles of the top 1% remain intact, with their net wealth, or net cash
positions, even stronger today than they were five years ago.
Without a clear path to corporate tax reform, we expect the wealth inequality to widen over the near term.
In our view, current U.S. corporate tax policy and accommodating credit market conditions have been primarily
responsible for this growing wealth gap. We believe the top 1% generates more than half of their cash flow offshore,
which is mostly unrepatriated due to high potential taxes. The result: Overseas cash accounts for 83% of overall cash
for companies among the top 1% that report it. At the same time, however, companies are concentrating their cash
uses domestically, mostly for shareholder returns and capital spending, and we believe the gap between the domestic
sources and uses of cash may be as high as $100 billion for the top 1% alone. In turn, the top 1% is turning to the debt
market to fund the domestic cash deficit through what we call synthetic cash repatriation.
Still, a rising level of absolute debt has not hurt the top 1%'s credit profiles in our view. In fact, the top 1%'s net wealth
or net cash position is stronger now than it was five years ago. With no near-term shift in tax policy or a tax holiday in
sight, we expect the top 1% to continue increasing their share of the overall cash pie through overseas cash growth
and domestic borrowings.
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Corporate Wealth Is Concentrated In Relatively Few Hands
In 2013, the top 1% of the largest cash holders among Standard & Poor's rated nonfinancial corporates (18 out of
approximately 1,800 issuers) held 36% of the $1.5 trillion in total cash and short-term investments. This ratio is
materially higher than the 27% reported in 2009 and continues a steady climb in wealth concentration among the top
1%. In contrast, the remaining 99% held 64% of the overall cash and short-term investments in 2013, a significant
decline from 73% reported in 2009. More broadly, the wealthiest top 10% controlled 78% of the cash, and the top 20%
held 89% of the total cash, leaving only 11% of the cash for the bottom 80% (more than 1,400 issuerssee chart 1).
Chart 1
In all, the top 1% increased their cash and short-term investments by 11% year-over-year, or by more than $50 billion,
during 2013. Given the global nature of their business, the five largest cash holders belonged to the technology
industry, and a total of seven technology issuers accounted for 57% of the wealthiest 1%. Five health care companies
were among the top 1% and made up 21% of the total. As expected, the ratings distribution was strongly biased
toward investment grade, with 15 out of 18 issuers in the 'A' rating category or higher, with only one speculative-grade
issuer (General Motors) among the richest 1%.
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2014 Cash Update: Corporate America's Richest 1% Keep Getting Richer
Chart 2
The Cash To Assets Ratio Gap Is Widening
The division between the 1% and the 99% is even more glaring when comparing the ratio of cash and short-term
investments to total assets. Over the past five years, the top 1% has steadily increased the cash to assets ratio, to
23.6% in 2013 from 20.4% in 2009. In contrast, the 99% have been stuck in the 7% area since 2009 despite the
gradually improving economic outlook (see chart 3).
The 99% comprises a diverse group of large investment-grade issuers and small, many private, speculative-grade
issuers. In contrast to the top 1%, the 99% tend to be less global with higher domestic cash balances, which are more
easily distributed to shareholders. Sponsor-held companies, no matter how profitable, tend to keep modest cash
balances at all times and contribute to the low cash-to-assets ratio.
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2014 Cash Update: Corporate America's Richest 1% Keep Getting Richer
Chart 3
The Growing Wealth Gap Is Due To Unrepatriated Overseas Cash . . .
The top 1% comprises large global enterprises generating significant cash flow. Based on our analysis that the top 1%
derives about 55% of its revenues offshore, we estimate that more than half of the cash flow is generated offshore as
well. The cash generated overseas is rarely brought onshore due to taxes of up to 35% upon repatriation. This is on top
of taxes paid in the country in which the revenue was generated. As a result, overseas cash continues to accumulate
untouched. Of the eight issuers disclosing their overseas cash positions among the top 1%, 83% of their overall cash
was held overseas, an increase from 79% in 2012. These eight issuers grew overall cash balances by $41 billion, or
15%, during 2013, but $43 billion of this growth came from overseas, indicating that domestic cash balances actually
fell by $2 billion during the year.
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2014 Cash Update: Corporate America's Richest 1% Keep Getting Richer
Chart 4
. . . Resulting In A Domestic Cash Shortfall Near $100 Billion
Unlike the sources of cash flow, which are generated both domestically and offshore, uses are concentrated
domestically, mostly for share repurchases, dividends, and capital spending, leaving many companies with domestic
cash deficits even as overseas cash accumulates. Assuming that the geographical source of cash flow is similar to the
revenue mix (45% domestic versus 55% overseas), we believe the top 1%'s domestic cash flow is not even sufficient to
cover dividends and net share repurchases (there would be a deficit of roughly $25 billion). In all, net of other uses,
including acquisitions and the estimated portion of domestic capital spending, we believe that the mismatch between
domestic cash sources versus uses accounted for as much as a $100 billion cash shortfall in 2013 for the top 1%.
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2014 Cash Update: Corporate America's Richest 1% Keep Getting Richer
Chart 5
Domestic Cash Shortfall Is Offset Through Synthetic Cash Repatriation
As overseas cash continues to grow untouched, the top 1% has supplemented its domestic cash shortfall through the
credit markets. The eight issuers in chart 4 alone issued $41 billion in new debt during 2013, nearly matching the $43
billion growth in overseas cash via synthetic cash repatriation. Large debt issuances by cash rich companies, such as
Apple Inc. (AA+/Stable/A-1+) and Cisco Systems Inc.(AA-/Stable/A-1+), during the past year support this view. We
believe the availability of cheap debt has been a key driver for the record cash balances for not just the top 1%, but for
U.S. corporates overall. Further, without access to the accommodating credit markets, the top 1% would likely not
have provided the returns that shareholders have become accustomed to in recent years. Or at the very least, the cash
balances would be a lot lower after repatriation taxes and shareholder returns.
Higher Debt Has Not Hurt The Top 1%'s Credit Profiles
Despite the rising absolute debt level of the top 1%, their credit profiles have not deteriorated. If we view cash and
short-term investments as wealth, a perspective on net wealth (or cash minus debt) is just as important from a credit
perspective. From this vantage point, the top 1%'s net wealth is perhaps even stronger today than it was five years ago.
In 2009, the top 1% held 85 cents of debt for every $1 of cash while the 99% held $4.56 of debt for every $1 of cash. By
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2013, the top 1%'s net cash position strengthened, to just 63 cents of debt for every $1 of cash, despite the increase in
the absolute level of debt. We view this as proof that, despite the easy access to the credit markets, the top 1% has
generally exercised restraint by limiting debt issuance to less than total cash growth.
Conversely, the net cash position deteriorated somewhat for the 99%, to $4.96 of debt for every $1 of cash by 2013.
We attribute this mostly to the same benign credit market conditions that have allowed smaller, many sponsor-held,
issuers to increase leverage for shareholder distributions. In all, this large net wealth disparity translated into a $200
billion net cash position for the top 1% versus a $3.8 billion net debt position for the 99% in 2013.
Chart 6
The Rich Will Continue To Get Richer
The rising cash balances of the top 1% are a result of tax-policy driven synthetic cash repatriation and an
accommodating credit market full of yield-starved investors. Although companies in a volatile industry, such as
technology, need a strong source of liquidity or a good cash cushion, we believe tying up nearly a quarter of a
corporation's assets in mostly inaccessible cash is not what these issuers had in mind. We believe that, if given the
choice, most would prefer to repatriate the cash and limit debt issuances. However, investors are demanding greater
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2014 Cash Update: Corporate America's Richest 1% Keep Getting Richer
return of this cash through share buybacks and dividends, regardless of where its domiciled. With no near-term shift in
tax policy or a tax holiday in sight, we expect the top 1% to increase their cash balances further over the intermediate
term through overseas cash growth and accompanying domestic debt issuances.
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