Are Canadian Firms Hoarding Cash?

By Ari Charney • January 1, 2013 • Canadian Edge Weekly

Corporate spending remains one of the few bright spots in the Canadian economy, yet few seem aware of this reality. That’s because news reports following a controversy ignited by comments made by the head of Canada’s central bank back in August fixated on a stunning statistic without offering appropriate context.

Back in late August, Bank of Canada Governor Mark Carney famously upbraided Canadian companies for their reluctance to spend down their corporate cash hoards. He described the cash supposedly idling on corporate balance sheets as “dead money” and exhorted companies to either reinvest in the growth of their businesses or give the money back to shareholders.

Carney offered his admonition in response to a question following his speech to the Canadian Auto Workers union. The president of the union complained that companies were not investing in hiring or job training and cited as evidence a data point that seemed almost as noteworthy as Carney’s response: According to Statistics Canada, the Canadian government’s central statistical agency, as of the end of the first quarter of 2012, Canadian non-financial companies were sitting on roughly CAD526 billion, a jump of 43 percent since 2009.

This widely reported figure seemed to underscore the problems facing Canada’s sluggish economy. But before you start salivating at the prospect of a rise in future payouts, those hundreds of billions are actually an estimate of cash on the balance sheets of both public and private companies of all sizes.

And a subsequent study undertaken by National Bank Financial found that the 327 publicly traded companies tracked by its analysts are actually holding just $55 billion in cash. Beyond that, these large companies are hardly stockpiling cash in an unproductive manner. For example, more than 55 percent of these firms already return cash to shareholders in the form of dividends or distributions, while another 20 percent have used cash for share repurchases.

The report noted that most of the companies it analyzed hold cash to finance future growth via capital expenditures or acquisitions, manage debt or add value to the capital structure. At the same time, some companies generate strong cash flows, so they’re able to maintain a solid cash position on their balance sheet even when they’re investing for growth. Presumably, privately held companies are deploying their cash in a similar manner. 

Interestingly, the report did name a handful of companies that are in the enviable position of being able to return more cash to shareholders: Agrium (TSX: AGU, NYSE: AGU), TransCanada Corp (TSX: TRP, NYSE: TRP), Enbridge (TSX: ENB, NYSE: ENB), Suncor Energy (TSX: SU, NYSE: SU), SNC-Lavalin Group (TSX: SNC, OTC: SNCAF), Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) and National Bank of Canada (TSX: NA, OTC: NTIOF).

And of course, at least some companies may be holding higher cash balances during this extended period of economic uncertainty than they might in a time of more robust economic growth. After all, that customary conservatism is what enabled Canadian firms to emerge from the 2008-09 global downturn in far better shape than many of their developed-world peers.

Even so, an examination of the components of Canada’s gross domestic product (GDP) shows that business investment was one of the rare areas exhibiting decent mid- to upper-single digit growth in three of the four quarters (fourth-quarter data is still based on forecasts).

The strongest subset of business investment was non-residential construction, which averaged 6.3 percent sequential growth during the first three quarters of 2012. Spending on machinery and equipment (M&E) averaged a less impressive 2 percent sequential growth over that same period, though it still outpaced Canada’s tepid growth in GDP. 

However, economists are forecasting much stronger growth in business investment for 2013. This is due to such factors as the aforementioned high levels of corporate cash, as well as the continuation of low borrowing costs. In the M&E arena, the strong Canadian dollar is actually helpful since much of the most cutting-edge equipment is imported from the US.

While the consensus is that Canada should experience growth in GDP of 2 percent in 2013, business investment is expected to remain relatively strong. Indeed, economists at BMO Capital Markets forecast sequential growth in business investment will average 10 percent this year, with growth in spending on non-residential construction averaging 10.3 percent and M&E averaging 9.3 percent.

Nevertheless, they still characterize such spending as “constrained” by economic and political uncertainty as well as volatile commodity prices.

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