Any parent of a recalcitrant toddler has to have a lot of empathy for what Bank of Canada Governor Mark Carney is going through.
Looking at his comments on Canadian companies being too cautious to invest, one cannot help but think of taking a three-year-old swimming.
You do everything you can to prepare the kid. You tell the child how strong and smart they are, how good they are going to be, how there are no sharks or monsters in the water. You outfit them with the best life jacket. You promise that if they just jump in, you will catch them. You stand them on the edge of the pool and urge them to go for it, and... nothing.
No amount of cajoling will get them to move. So eventually, despite yourself, because you know the kid can do it and you are tired of standing in the pool shivering and sweet talking, you start the subtle psychological digs. Everybody else is doing it. Are you a ‘fraidy cat?
So we see Mr. Carney poking corporate Canada directly in the eye, accusing executives of being out of ideas and lacking the creativity to find good uses for all the cash piling up on their balance sheets. He has tried the sweet talking. He has provided the safety gear in the form of low rates and abundant liquidity. He has promised to catch companies if the economy falls. And yet, nothing. So he has resorted to a harsher form of goading.
The fact is, Mr. Carney’s line of attack, the idea that if companies can’t find uses for the money they should give it to shareholders, feels like a bit of a canard. But at this point, it is a question of doing what is necessary to get companies moving in the direction Mr. Carney wants.
“He’s desperate, but why would these guys give the money back, they are nervous like we are,” said David Taylor, a stock investment specialist who runs Toronto-based Taylor Asset Management. In this environment, “they are giving back, as much as they can,” he said.
For starters, yes, Canadian companies have a lot of cash. Some of them billions. But they have been raising dividends. The dividend yield of the benchmark Canadian stock index is at its highest in a decade, if you exclude a spike in the financial crisis (when stock prices fell, driving the yield up).
Big stock buybacks abound. Agrium Inc. just sold a share in a fertilizer plant and unveiled a $900-million buyback. Telecom companies such as Rogers Communications and BCE Inc. have been buying back stock and paying out more in dividends.
Do shareholders want more money back? At the margin, sure. What’s not to like about a dividend increase? Reliable dividend paying companies have been rewarded with strong price appreciation.
But at the same time, investors choose companies to invest in based in large part on their ability to allocate capital, so there is a fair bit of deference given by institutional shareholders to management teams on the best way to use their cash. For the moment, there is no great clamour for even more payouts from most well-run companies.
“They know their business better than anybody else,” said Mr. Taylor. “I would never say to a company, ‘Look if you can’t find anything to buy give me back the cash.’”
What’s more, when money is distributed to shareholders, big professional investors generally buy more stocks or bonds, perhaps in other companies. And who is to say the managers of those companies will be any more likely to spend the cash on their balance sheets as Mr. Carney would like.
The problem is that investing is one of a menu of options that a company has for cash.
The board of directors and management have their internal hurdle rates that investments must meet, and all those assumptions are based on economic growth and confidence.
And the economy, as Mr. Carney well knows, needs investment from corporations to start the virtuous cycle of confidence and growth.
It’s a chicken and egg conundrum that is undermining the transmission mechanism of monetary policy. Central bankers are pushing out the cash, but it is not getting where it needs to go because so much is piling up on corporate balance sheets.
Mr. Carney has to find a way to start the cycle moving in the right direction. The central banker surely believes that once companies jump in and start spending, they will find that it is a rewarding experience. And he is clearly losing patience with standing in the pool repeating himself.
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