Bank of Canada governor Carney made a glaring omission before admonishing corporate Canada for hoarding cash – he forgot to check cash flow. Corporate investment in Canada continues to track cash flow generation and, in fact, capital investment by domestic companies is above normal levels.
If Governor Carney's charges of cash hoarding were accurate, we would expect to see capital expenditure growth falling below cash flow. But since June 2012 the reverse is actually true. Canadian companies have continued to spend and invest while cash flow growth has declined.
Our chart - year over year growth in cash flow for all companies in the S&P/TSX Composite compared with aggregate capital expenditure - tells the tale. Between 2003 and early 2008 Canadian companies, notably in famously capital intensive resource sectors, ramped up investment and expanded capacity to feed the massive Chinese economic growth engine. These companies were rewarded with outsized cash flow growth between mid-2007 and 2009.The relationship held during the post-crisis recovery - as conditions stabilized, capital expenditure increased.
For investors, the divergence between capital spending and investment may form a positive indicator. In both the 2005 to 2008 period and 2010 to mid-2011, corporate spending growth provided a leading indicator for cash flow. This suggests that cash flow generation may rise to capital spending levels in the coming months, an event that would help push domestic equities higher.
But the Bank of Canada's charges of cash hoarding are off base. Corporate Canada is more than pulling its own weight in terms of investing for the future.
Scott Barlow