Corporate Cash Holdings Increase And Decrease

In a recent survey by the Association for Financial Professionals, 40 percent of companies increased cash holdings in the first quarter of the year, but 34 percent of companies reduced cash holdings. The 34 percent decrease in cash holdings is the largest in the survey history dating back to January 2011. Compared with the same period last year, 22 percent of companies have lower cash balances, while 43 percent have large cash balances. What these numbers indicate is uncertain. It could be that the reduction in cash balances is due to cash flow problems, or companies could feel more confident in the future and reducing excess cash.

GE Kicks Factoring

General Electric is serious about reducing the company's use of factoring. In 2018, the company factored about one-half of its receivables, but it expects eliminate all factoring in the near future. In 2016, the company even went so far as to sell receivables up to 5 years ahead of sales in order to increase the then current cash flow. A consequence of eliminating factoring is is that it will reduce cash flows this year. In fact, GE expects cash flows for 2021 to take a hit of $3.5 to $4 billion, but it will also reduce the interest paid on factoring. The elimination of factoring is also a signal that GE management is confident of future cash flows.  

Convertible Issues At Record Pace

There have been 97 convertible bond issues totaling $54.3 billion so far this year, a record pace. The average coupon on these bonds has been 1.41 percent, with 28 convertibles issued at a zero coupon rate. And the average conversion premium is 39 percent. One issue with convertible bonds is that dilution may occur if the bonds are converted. Companies often pay $10 million or more to protect against dilution. Some of the biggest issues and conversion premiums occurred in February and March, before interest rates rose. For example, in February, Expedia issued $1 billion in convertibles with a conversion premium of 72.5 percent, and Airbnb issued $2 billion in convertibles with a conversion premium of 60 percent. The large conversion premiums to indicate a high level of confidence by bond buyers.

I Bonds

While most people are familiar with EE savings bonds, fewer are familiar with I bonds. A recent article in the Wall Street Journal highlights I bonds and the advantages of these bonds. One major advantage is that I bonds are yielding an currently very high interest rate of 3.54 percent. This is impressive when you consider the bonds are virtually risk-free. By way of comparison, 30-year Treasury bonds are yielding about 2.25 percent. I bond yields are based on the inflation rate and can change every six months. You cannot redeem I bonds for 12 months, and if you redeem within five years, you pay a penalty of the last three months of interest. You can buy electronic I bonds at www.treasurydirect.gov in any amount from $25 to $10,000, or paper I bonds in $50, $100, $200, $500, or $1,000 as a tax refund. One way to tell that I bonds are good investments is that the government caps the annual electronic purchase at $10,000 per individual, with another $5,000 possible through the tax refund purchase.

Ford Abandons Brazil

A century ago, Henry Ford lost a considerable amount attempting to become a rubber baron in Brazil. Now, Ford is retreating from Brazil again. Over the past decade, the company lost about $7.8 billion on its Brazilian manufacturing, or about $2,000 per car, so the company exercised its option to abandon. Ford recently announced that it would close its plants in Brazil, paying an additional $4.1 billion to get out of commitments in the country, for a total loss of about $12 billion. Other car companies are also losing money in Brazil, with Volkswagen Brazil losing about $4.1 billion since 2011. Sometimes it is better to abandon a plan rather than continue to lose money.

Morningstar Stock Valuation

So how do analysts value a stock? A recent video from Morningstar, one of the most trusted independent sources for stock values, discusses the methodology it uses. If you watch the video, you will hear a lot of methodology similar to what we discussed in the textbook, especially discounted cash flow analysis. Similar to what we discussed, the value of the stock increases by the capital gains yield and will change as new information is received. Notice an important point: Morningstar only recommends a stock if it believes that is fair value is significantly above the current market value, which implies Morningstar does not believe the market is semistrong form efficient.

SPAC Issues Fall

SPAC issuance this year has been at a record pace, but an accounting change by the SEC appears to have slowed the market dramatically. The SEC recently announced that warrants issued by SPACs would be classified as liabilities, not equity. In March, 109 SPACs went public, but that number is is down to 10 in April. Warrants are typically granted to early investors as extra compensation for the cash invested. Valuing these warrants will be expensive and it appears that many companies may not have the internal capacity to do so. And the warrants will need to be valued every quarter when the company files its 10-K.