Cash and equivalents for the S&P 500 are steady for the second consecutive quarter

Although cash and marketable securities (cash) balances for the S&P 500 index are down 2% since Q1 2011, year-over-year growth is positive at 7.6%. While cash offers liquidity and security, FactSet’s Alpha Testing, a back testing application, shows that companies that hoarded cash have not rewarded shareholders relative to their peers. On a ten-year, cumulative basis, companies in the fourth quartile by cash and marketable securities outperformed the S&P 500 by 63% and outperformed the first quartile by 68%.

Looking at historical data, aggregate cash balances for the index have grown year-over-year since Q2 2009. A primary reason for the run-up in cash is that cash inflows have recently outpaced the major sources of cash outflows from reinvestments and distributions. On a trailing twelve month basis, the third quarter’s operating cash flows (OCF) were 55% greater than the ten-year quarterly average, which dwarfs the recovery in spending for capital expenditures, dividend payouts and dollar-value share repurchases.

Despite this boost in cash flows, the number of companies reporting quarterly earnings below quarterly OCF has remained consistent in recent years. Approximately four-fifths of S&P 500 companies have reported greater OCF than earnings during the past ten years. However, since the first market shudders of mid-2007, cash flows have been followed more closely by investors. Since 2007, FactSet’s Alpha Test shows that companies with operating cash flows greater than earnings outperformed their peers in the S&P 500 by over 60%.

Read more about the trends in corporate cash balanaces and quarterly investment activities of companies in the S&P 500 in this quarter's edition of FactSet Cash and Investment Quarterly.

All of the data used to compile FactSet Cash and Investment Quarterly is available in the FactSet workstation.