With companies having started posting third quarter results amid a slowing economy, some money managers are paying close attention to one part of corporate balance sheets: Cash levels.
US companies have been seeing their cash levels drop, a sign that high inflation and a slowing economy are taking a toll and could make it harder for some corporations to meet their obligations. Quarterly cash balances for companies in the S&P 500 index fell 14% to about $1.9tn in the second quarter from a year earlier, excluding financial companies, according to a Bloomberg analysis. 
Amazon Inc and Meta Platforms Inc, experienced some of the biggest decreases in the most recent periods they’ve reported for. Individual companies may have good reasons for cutting cash levels now, but when the figures are falling in aggregate while the economy is slowing, it often signals that corporations are generating less revenue, or expenses are growing, or both. 
Companies tend to dip into their savings before building up debt ahead of a slowdown, David Knutson, head of US fixed income product management at Schroders in New York, said in an interview. Credit market investors have been optimistic that companies’ fundamental financial picture remains strong, he added, but this is one of the first signs that their situation is deteriorating.
“The withdrawal of liquidity is something that is going to have a profound impact,” Knutson said, referring to the Federal Reserve cutting the money supply. “Eventually something will crack, something will be exposed.”
For the handful of non-financial companies that have posted results for the third quarter, some have seen levels drop. Delta Air Lines Inc, for example, posted $8.4bn of cash, equivalents and short-term investments at the end of the third quarter, down from $13.2bn in the same period last year and from $10.8bn at the end of the second quarter, albeit well above pre-pandemic levels. 
For corporate bond investors, it’s particularly worrisome for many companies to be paying more money to shareholders even as cash levels are dropping, Collin Martin, fixed income strategist at Schwab Center for Financial Research, said in an interview. 
Share buybacks for non-financial S&P 500 companies are up by around 40% to about $800bn in the last four quarters, according to Bloomberg analysis. Meta Platforms, for example, bought $20bn of shares in the final quarter of 2021, about 10 times more than they had in the same quarter a year earlier. 
In addition to share buybacks rising, that same group of non-financial companies boosted dividend payments in the last four quarters by 7% from the equivalent period before, according to data compiled by Bloomberg.
For now, corporate credit quality by most measures is still strong. Debt service coverage ratios, which essentially show how much earnings companies have relative to their interest payments, are at the highest levels ever this year, in records going back to 2000, Fitch Ratings’s Olu Sonola said in an interview. And for junk bonds, default levels are just about 2%, less than the long-term average of 3.7%. 
Corporations built up high cash levels during the pandemic, and are just taking them down to more reasonable levels now, said Joe Boyle, fixed income product manager at Hartford Funds, who currently manages about $127.4bn, said in an interview. “You have to look at every company and you have to look at the starting point coming into this year - balance sheets were very robust,” Boyle said. 
The money that’s going out the door to shareholders now could be sorely missed in a year or two when the economy is in worse shape. And if earnings fall for companies in the coming quarters, the picture will get much worse, said Mark Freeman, chief investment officer and founding partner of Socorro Asset Management, which has $600mn assets under management.
“It bears watching as companies continue to consider what they want to do with the cash holdings they have.”