What are we looking for?
Dead money ready to come to life.
The International Monetary Fund recently re-ignited the debate over corporate Canada hoarding cash, a criticism first levelled two years ago by then-Bank of Canada governor Mark Carney.
In March, the IMF reported that Canadian companies have been accumulating cash reserves faster than any other member of the G7. Statistics Canada estimated the size of the cash hoard at $626-billion as of last year’s final quarter.
With some analysts expecting a resurgence of mergers and acquisitions in Canada, and with the oil patch buzzing with activity, we went looking for cash-rich companies that might be in a good position to spend.
How did we do it?
We first screened Canadian-listed companies for those with cash and near-cash items of greater than $200-million.
We also wanted to exclude companies that might be maintaining large cash balances for good reason. Companies with debt-to-equity ratios of greater than 60 per cent were excluded – as were those that didn’t make a profit in their last fiscal year.
We also limited the search to companies that had an average return on equity of greater than 7 per cent over the last five years.
And finally, we wanted only companies that were paying out less than 60 per cent of their profits as dividends, one possible indication of future dividend increases.
What did we find?
The list of 16 Canadian stocks, weighted most heavily toward financials and resources, presents a starting point in looking for companies that have lots of cash and might be inclined to use it.
As always, investors should do their own research.