Moody's: Cash up at US investment-grade firms and down at speculative-grade companies in 2014; total of $1.73 trillion an all-time high

Cash at US non-financial investment-grade firms continued to climb in 2014, while at US non-financial speculative-grade companies it fell, Moody's Investors Service says in a new report. For the fifth consecutive year revenue grew faster at speculative-grade companies, while these firms also directed a far higher percentage of cash flow to shareholders.

"At the end of 2014, investment-grade companies' aggregate cash was up 9% on the prior year, to $1.4 trillion, while at speculative-grade companies it was down 9%, to $281 billion," says Senior Vice President, Richard Lane. "Steeper increases in capital spending at speculative-grade companies, as well as their heavier allocation of discretionary cash flow to acquisitions and shareholder returns, contributed to the divergence."

Speculative-grade companies spent 397% of their discretionary cash flow on dividends and buybacks last year, against investment-grade companies' 97%.

Capital spending at speculative-grade firms rose 7.2%, to $223 billion, in 2014, while at investment-grade companies it increased 6%, to $714 billion, Lane says in "M&A, Shareholder Returns Drive Lower Cash Balances At Spec-Grade Firms." Spending on plant and equipment by all Moody's-rated US non-financial companies has gone up every year since the 2008-09 recession, accounting for 7.9% of revenue last year, against an average of 7.3% since 2007.

Acquisition spending rose more among investment-grade companies in the past 12 months in absolute dollars, but accounted for a larger portion of speculative-grade firms' discretionary cash flow. While investment-grade companies spent 30% of discretionary cash flow, or $194 billion, on acquisitions, speculative-grade companies spent 950% of discretionary cash flow, or $128 billion.

Revenue, cash flow from operations and EBITDA all grew faster at speculative-grade firms than at investment-grade companies in 2014, although investment grade is much larger, representing 77%, 84%, and 85% of each category's total.

"Based on our outlook for low-single-digit global economic growth in 2015-16, and weakness in the energy sector, we expect slower revenue growth and a decline in cash flows this year at both investment-grade and speculative-grade firms," Lane says. "In terms of margins, the investment-grade sector remains stronger and more stable, with an average EBITDA margin of 17.5% since 2007, while in the high-yield sector it has averaged 10.2% over the same period."