America cannot cut its way to prosperity Companies are at last beginning to reduce their cash piles. By the end of last year, cash held by US companies in the S&P 500 index had hit a record $1.7tn, causing mounting concern at a time when households and governments were attempting to reduce leverage. European corporate cash levels were also very high. So this is exactly what both investors and politicians have been demanding. However, investors might not be so thrilled by the way in which companies are whittling down their cash. It is not, as a rule, via higher dividends or share buybacks, much-demanded measures to boost shareholder value. Nor is it by any significant return to mergers and acquisitions, or any innovative investments. It continues to be depressingly obvious that corporates cannot find anything very exciting on which to spend their money. No, unfortunately it appears that cash piles are coming down because the flow of cash coming in to companies, in the form of revenues, is slowing to a trickle. The figures are interesting. According to S&P Capital IQ, the data provider and analyst, US corporate cash (as measured by the S&P 500) nudged down slightly in the first three months of the year, quarter-on-quarter. This was the first time this had happened since 2008, as companies adopted exceptionally conservative cash management in the uncertain post-crisis environment. Corporate cash piles remained higher than they were 12 months earlier, but the annual rate of growth had slowed to 6.8 per cent, again its lowest since the crisis year of 2008. Meanwhile, in an indication of the pressures created by the eurozone crisis, the European corporate cash pile shrank 6.85 per cent last year (the most recent period for which the accounts are available). This decline may be overstated by big falls at a few big companies, but the trend of cash accumulation does appear to be over. In small part, this is because companies have acceded to demands for dividends from investors. These remain intense. Buying high dividend-yield companies was virtually the only way to make money in the stock market last year, and high-dividend funds were set up to capitalise on demand from investors. Surprisingly, it looks as though that trend still has further to go. After lagging during the winter rally, those funds are beating the market for the year. Companies who raise dividends are still being rewarded with a higher share price. So far this year, 181 non-financial S&P 500 companies have increased dividends, compared with 149 companies in the comparable period a year ago. They are also obliging with share buybacks, with $150bn announced so far this year by 79 non-financial S&P 500 companies. But figures from TrimTabs suggest that corporate buying is slower this year than last. Rather than such deliberate actions, the fall in corporate cash appears more to do with factors beyond companies" control. Earnings data are now pouring out of the US for the second quarter. The season's headline is that most companies have beaten earnings expectations. As this follows an almost unprecedented effort by companies to talk down their earnings prospects, little or no importance should be attached to this; it is just spin. But, even though most companies are beating earnings estimates, 56 per cent have so far failed to match their revenues estimates. The latest running tally from Thomson Reuters shows that the S&P 500 is now on course for pathetic year-on-year revenue growth of only one per cent - against profit growth of 5.4 per cent. Falling energy prices and lower sales by energy companies have driven the poor revenue numbers. Financials and healthcare have even seen optimism over their sales increase over the past few months. But the pattern is ugly. With companies disappointing on sales while surprisingly positive on profits, cost cuts must be running far deeper than Wall Street had thought. Building big cash piles that can be drawn on, does now seem to have been wise. But Corporate America cannot cut its way to prosperity forever. This trend is likely to make an already unpleasant US election season even uglier. Lingering high unemployment will damage President Obama. A plausible claim that it can be blamed on cost-cutting profit-hungry capitalists will be hurled back at the Republicans. Political uncertainty will intensify, creating added volatility. One strange corollary is that if yields on bonds stay low (and they can rise a lot and remain low by historical standards), demand for yield from stocks will stay high. Companies with deep cash reserves to meet dividends, which generate decent revenues in this environment, could remain very popular. Pressure from investors to part with that cash is not going to abate.