By Theo Francis and Thomas Gryta
The fast-spreading coronavirus has prompted even the biggest U.S. companies to cut their spending and bolster their balance sheets, proving once again how cash is king, especially in times of crisis.
After a decadelong U.S. economic expansion, not every company has entered this crisis with the same cash cushion. Apple Inc. ended the year with $247 billion in cash, securities and account receivables, enough to run its operations for more than a year even if it didn't cut costs or sell a single iPhone. Discount retailer Dollar General Corp. had $240 million, enough for about four days, in the unlikely event it had to shut its doors and didn't cut any costs.
Dollar General said its business model generates significant cash flow and has performed well in a variety of economic cycles, and the company has access to lines of credit and good access to the capital markets. Apple declined to comment.
Technology companies generally operate with more cash on hand than retailers, which often have assets in unsold inventory. The median amount of cash and other readily available assets to continue to operate in an extreme scenario without revenue or cost cutting was about 270 days at an S&P 500 tech firm, while the median was closer to 60 days for retailers, according to a Wall Street Journal's analysis.
As companies prepare to close their books on a tumultuous first quarter, these measures can reveal how well-prepared they are for the sudden financial stress. Economists expect the crisis to cost the U.S. economy as much as $1.5 trillion in lost output over five years, including a decline in gross domestic product of 4% to 10% in the second quarter, a recent Journal survey of economists found.
"The investor mindset has shifted quickly to the balance sheet," said Ron Graziano, an accounting and tax analyst at Credit Suisse. Sometimes factors that people don't follow during a booming market suddenly become important. "The ones going into it with the bigger cushion are better positioned to survive."
Delta Air Lines Inc. and Ford Motor Co. have stopped paying dividends. Boeing Co. has tapped out its credit lines, while General Electric Co. is cutting jobs. AT&T Inc., Intel Corp. and Chevron Corp. have shelved share buybacks.
In many cases, the crunch on corporate finances comes after years of cheap debt and easy credit that allowed companies to expand while building a $10 trillion mountain of debt. AT&T, following its 2018 takeover of Time Warner, had more than $150 billion in net debt at the end of 2019, though it has pledged to pay down its borrowings.
At the same time, many companies used spare cash to repurchase their own shares. In 2019, companies in the S&P 500 spent an estimated $729 billion on buybacks, second only to the record $806 billion spent in 2018, according to S&P Dow Jones Indices.
President Trump and Democratic lawmakers placed restrictions on share buybacks as part of the $2 trillion coronavirus stimulus package expected to pass Wednesday to help industries wounded by the pandemic.
Cardinal Health Inc., which distributes medications and medical supplies, had total liabilities of $40 billion at the end of December, including $5.6 billion related to a proposed settlement of state opioid litigation. That amounted to 40 times its shareholders' equity, a common measure of the degree to which a company's assets exceed its liabilities.
By contrast, the median debt-to-equity ratio for the health-care companies in the S&P 500 was 1.2, according to a Wall Street Journal analysis of S&P 500 financial data provided by Calcbench. A spokeswoman for Cardinal Health had no immediate comment.
Kimberly-Clark Corp., which makes Huggies diapers, Kleenex tissue and other consumer products, reported liabilities 77 times the size of its shareholders' equity at the end of 2019, the Journal analysis found. The ratio for competitor Procter & Gamble Co. was 1.4. Kimberly-Clark didn't respond to requests for comment, and P&G had no comment.
Traditional debt-to-equity ratios probably understate the debt burden many companies carry, Columbia University accounting professor Shivaram Rajgopal said. That is because the assets of big companies are increasingly intangible or difficult to monetize, such as goodwill generated from mergers or intellectual property. "In a crisis, that goes up in smoke," Prof. Rajgopal said.
Some companies that came into the year with an investment-grade credit rating still only reported enough cash and other readily available assets to operate for a short time in an extreme scenario where their sales stalled and they didn't cut costs. They include paint-maker Sherwin-Williams Co. (54 days) and home-improvement chain Home Depot Inc. (17 days).
Sherwin-Williams doesn't carry cash but has $3.5 billion of available liquidity, a spokesman said. Home Depot can adjust its costs and believes its investment-grade credit rating is a better measure of the retailer's ability to access capital when needed, a spokesman said.
These figures are rough estimates: They are calculated by comparing a company's cash, marketable securities and accounts receivable -- all of which tend to be easier to liquidate than such assets as factories or inventory -- to an estimate of its cash operating expenses.
In reality, companies can -- and do -- cut expenses to meet declining demand, and most could be expected to generate some revenue in all but the most catastrophic downturns. Many U.S. retailers have already taken steps to improve their liquidity. Still, analysts say these and similar measures can serve as a relative gauge of the resources available to companies in a crisis.
"You'd have to be Rip Van Winkle not to be cutting costs as quickly and prudently as you could," said Matt Furman, spokesman for electronics retailer Best Buy Co., which like many retailers has halted stock buybacks and tapped a revolving credit line. Best Buy is selling only online and via curbside pickup despite what it described as a surge in demand.
If Apple didn't sell another iPhone or Mac computer, it could operate for 492 days while continuing to make its products. Social networking giant Facebook Inc. could keep its servers humming for more than 21 months without selling a single ad. Facebook referred questions about its cash burn to an update describing a surge in its services that don't generate ad revenue.
Some of the companies that entered this crisis without big cash reserves sent much of the cash they produced from operations to shareholders, as dividends.
"Companies went into this situation with relatively limited cash balances," said Torsten Slok, chief economist at Deutsche Bank Securities. "It is rather unfortunate they had lower cash balances and thereby became more vulnerable to this shock we have at the moment."
Within industries, the dividend payout can vary. Casino operator Las Vegas Sands Corp. paid 99% of the cash it generated from its operations over the past year as a dividend, while rival MGM Resorts International paid 15%.
"In recent years, we've been more focused on strengthening the balance sheet rather than paying a higher dividend," Aaron Fischer, MGM's chief strategy officer, said.
Sands' dividend payout appears higher than in recent years because of an upfront payment to lease land for an expansion in Singapore, reducing cash flow for the year, a Sands spokesman said. Absent that transaction, he said dividends would have consumed about 75% of the company's cash flow from operations.
The payout level depends on management's comfort with having enough cash flow remaining along with its ability to access cash. Altria Group Inc. paid out $6.1 billion in dividends in 2019, amounting to 77% of incoming cash, and the tobacco giant intends to make its next scheduled dividend payment in April, according to a person familiar with the matter.
"Our dividend payout ratio is higher than most [consumer-product companies] because of Altria's ability to generate cash," an Altria spokesman said.
The Marlboro maker typically hits its highest peak of cash for the year in the first quarter, and has a $3 billion line of credit, said Chief Financial Officer Billy Gifford, who is acting CEO while the company's top executive is ill with the coronavirus. "We've been in discussions with banks," he said. "We feel good about it."
Jennifer Maloney contributed to this article.
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