Remember Bank of Canada Governor Mark Carney's assertion in August that corporate Canada was sitting on over $500-billion in "dead money," depriving investors and the Canadian economy as a result? A new study by Moody's Investors Service says Mr. Carney got it dead wrong. If anything, corporate Canada may not be handling its cash as carefully as it should.
Moody's examined 96 Canadian companies – including Barrick Gold, BCE, Encana, Bombardier and other stalwarts – comparing their cash levels at the end of the second quarter with the situation at the end of 2006, when the economy was humming along.
The companies' total cash has indeed grown by an average of 8.9 per cent per year to $57.7-billion. But at the same time, the corporations haven't cut back on capital spending or dividends – two indications of cash hoarding. Just the opposite, in fact. Median capital spending is almost 50 per cent higher than it was in 2006, while dividends are up 33 per cent.
Cash, Moody's finds, "has grown in proportion with expenses," leaving companies at almost the same "fixed charge" coverage – the ratio of cash plus cash flows to expenses – as was the case in late 2006. "Despite their increased cash balances, the Canadian companies that we studied have roughly the same credit quality … as we observed in late 2006," the report states. If Canada were to suffer a recession equal to the one in 2008-09, default rates would be about the same as they were then, Moody's says.
Think about that: The corporations Moody's studied have as much cash proportionately as they did during a period when the outlook was far better. Bombardier is investing billions in its new C Series plane; Barrick is investing billions of dollars in gold mine in the Andes, Potash is in the final stages of investing billions to expand capacity in its home territory and Research in Motion is on the verge of launching a new operating system. Canada's banks have made a spate of foreign acquisitions recently and this week, retailer Leon's left the ranks of the cash-rich and debt-free to launch a $700-million takeover of The Brick. And so on.
These companies are spending like they're perched on the edge of prosperity, not calamity. (In fact, one of the few ways Canadian firms are showing prudence is by refinancing debts now that are coming due in the next two years, taking advantage of the low interest rate environment created by central bankers here and elsewhere).
That's great if you believe the U.S. won't go over the fiscal cliff, the European economy will rebound and China and India will return to their steadily growing ways. But "if you are an investor concerned about the fiscal cliff and think caution is warranted, perhaps you should be concerned," says Bill Wolfe, the Moody's senior vice-president in Toronto who led the study. "We're not observing caution in the numbers."
Governor Carney, please take note.
Sean Silcoff