What are we looking for?
Corporate cash ready to be spent.
Coinciding with a rebound in mergers and acquisitions in Canada and the United States, recent data show that corporate cash balances in both countries have begun to shrink.
According to FactSet, cash and short-term investment balances at S&P 500 companies declined sequentially, by 4.7 per cent, in the first quarter for the first time in seven quarters.
The reduction brought the total of those reserves down to $1.34-trillion (U.S.).
In Canada, there are also signs that corporate thrift is beginning to wane.
Cash balances fell in the first quarter for the first time in a year, dipping to $464-billion (Canadian).
These are modest deployments of cash for a sector criticized by many, including former Bank of Canada governor Mark Carney, for its reluctance to spend and its accumulation of “dead money.”
But on the possibility that the great hoards of cash held by North American corporations are starting to be put to use, we went looking for those companies in the best position to spend.
How we did it
We first established our criteria for cash. Canadian companies had to have total cash and near-cash items of at least $200-million.
The minimum for U.S. companies was set at $7-billion, all in their respective currencies.
Next, since we are looking for companies with both the means and the inclination to spend, we wanted to weed out those keeping large cash reserves in order to defend against a threat to the business or to service large amounts of debt.
Debt-to-equity ratios were capped at 60 per cent, earnings had to be positive in the past fiscal year, and the average return on equity over the past five years had to be higher than 10 per cent.
Finally, the payout ratio, or the proportion of earnings paid out in dividends, had to be less than 60 per cent, one possible indication of a dividend increase in the near future.
What we found
Eight U.S. companies and eight Canadian companies made the list.
These are mostly very familiar names – large, powerful companies that have weathered a period of uncertainty in part by building up cash.
While this list accounts for a tremendous amount of stockpiled financial ammunition, investors should conduct their own research to determine which companies are most likely to pull the trigger.
Companies with deployable cash reserves
|Company||Ticker||Cash ($M)||Debt/ Equity (%)||EPS ($)||5yr avg ROE (%)||Payout Ratio (%)||Mkt Cap ($M)|
|Power Financial Corp.||PWF-T||4,602.0||46.93||2.67||14.1||53.3||23,490.1|
|Great-West Lifeco Inc.||GWO-T||3,196.0||28.34||2.34||15.6||52.3||29,954.8|
|Husky Energy Inc.||HSE-T||1,518.0||24.68||1.85||10.4||44.6||33,852.4|
|Magna Int'l Inc.||MG-T||1,439.0||3.53||7.06||16.3||21.1||25,270.4|
|Ind. Alliance Insur. & Fin.||IAG-T||302.0||13.27||3.60||12.4||30.8||4,674.0|
|E-L Fin. Corp. Ltd.||ELF-T||284.6||10.60||227.18||20.9||0.5||2,825.6|
|Dominion Diamond Corp.||DDC-T||212.5||0.28||5.86||37.8||0.0||1,305.1|
|Johnson & Johnson||JNJ-N||19,722.0||22.58||5.07||19.3||39.5||317,254.7|
|UnitedHealth Group Inc.||UNH-N||7,514.0||49.58||5.76||17.6||25.1||85,820.3|
|The Charles Schwab Corp.||SCHW-N||7,173.0||35.32||0.80||10.8||24.5||37,717.8|
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