As Delta Variant Spreads, Corporations Conserve Cash
Corporations Sit on Record Cash Piles
The pandemic recovery was supposed to usher in an era of robust spending on the part of the nation’s biggest corporations. But with the Delta variant rapidly spreading and COVID-19 hospitalizations rising, companies including Carnival (CCL), United Airlines (UAL), Volkswagen (VWAGY), and BMW (BMWYY) are significantly scaling back their spending. They want to be prepared in case the recent COVID-19 spike results in new restrictions and shutdowns.
As of the second quarter, companies across the globe collectively have $6.84 trillion on their balance sheets, which is an all-time high. This marks a 2.6% leap compared to the first quarter. It is 45% higher than the five-year average pre-pandemic.
Travel Industry Prepares for the Worst
Companies in the travel industry are sitting on significant amounts of cash. Though many of them saw demand increase early in the summer, they are now concerned about downturns in the future. For example, though Carnival has slowly been restarting operations, it is holding on to roughly $9 billion in cash. For context, Carnival typically maintained a cash balance between $2 billion and $2.5 billion prior to the pandemic. In July Carnival raised $2.4 billion via a sale of debt.
United Airlines and Delta Air Lines are also carrying big cash balances even as they add more aircraft and flights to meet the pent-up summer travel demand. As of the end of the quarter United has $23 billion in cash and short-term securities, three times its cash position in 2019. Delta has $17.8 billion in liquidity, recently adding $1.6 billion to its war chest.
Corporate Bond Issuances Still Healthy
Even though many companies raised debt last year, there is still an appetite among investors. As a result, corporate bond issuances have remained robust in the past few months. Volkswagen and BMW both issued bonds this month to use for general corporate purposes. Volkswagen raised $3 billion while BMW brought in $2.5 billion. Volkwagen has a cash position of around $41 billion, which is up 88% year-over-year, while BMW’s cash stands at around $21 billion.
Investors may not be pleased to learn corporations have billions of dollars sitting in the bank instead of increasing their dividends or buying back shares. But with the pandemic raising uncertainty again, they may be more willing to accept some prudence on the part of corporate America. Granted they eventually put the money to work.
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