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Why there's no real harm in companies hoarding cash

Friday's edition of the Globe and Mail pushes forward the debate over Canada's corporate cash hoard, yielding the floor to the companies, which take the opportunity to explain why Bank of Canada Governor Mark Carney's "dead money" assertion is off the mark.

If he were to rebut, Mr. Carney might say the story proves nothing.

The article cites Open Text Corp., Suncor Energy Inc., Research In Motion Ltd., and Encana Corp. – four companies that were put off by Mr. Carney's remarks because they are doing exactly what Mr. Carney wants – investing – or have legitimate reasons for stuffing their vaults.

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Mr. Carney could say his point was a macro one; of course there are exceptions. The pages of Friday's Globe contain another article that could be used to make the macro argument. The folks at Globe Investor appear to have had little trouble drawing up a list of Canadian companies that are hoarding cash for no apparently good reason.

But corporate Canada is starting to get its macro counter-arguments together.

Late Thursday, Jayson Myers, an economist and head of the Canadian Manufactures & Exporters trade association, issued a statement entitled, "Setting the Record Straight: Canadian Businesses Doing their Part to Drive Economic Growth."

Mr. Myers accepts that non-financial companies are holding more cash and short-term deposits; $60-billion more since 2008, and $10-billion more for manufacturing companies. But he says the cash hoard of non-financial companies isn't that much larger than it was four years ago. And he contends there are good reasons to hold cash, since the value of other short-term assets, such as accounts receivable and inventories, has declined. Meantime, Mr. Myers says, short-term borrowing and other liabilities have increased.

"In the current economic climate, holding more cash is a good asset allocation decision," Mr. Myers says in his statement. "It is certainly not an indication that companies are wasting their money or that they have not been focusing on investments to grow their business or boost productivity." (Mr. Myers says in the statement that the net value of non-financial companies' capital assets has increased by more than $240-billion since 2008.)

Now, Mr. Myers is hardly a neutral party. Investment of $240-billion sounds like a lot, but maybe Mr. Carney could show that Canadian companies could do better?

A neutral rebuttal to Mr. Carney comes from Stéfane Marion, the chief economists at National Bank Financial in Montreal. Mr. Marion, a former economist at the Finance Department in Ottawa, calculated that liquid assets are 14 per cent of total assets, a record.

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However, he's skeptical about Mr. Carney's contention that shareholders would make more productive use of the cash, or that they even want it back. In a note to clients, Mr. Marion says that mutual fund data show that the percentage of dividend payments that simply are reinvested in the same funds has surged to 85 per cent from about 60 per cent in the mid-1980s and the early 1990s. (See the infographic on the side of this article.)

Mr. Marion attributes the shift to the way dividends are taxed, risk aversion and the fact that financial assets are increasingly geared for retirement savings.

"At the end of the day, the firepower of higher dividend payments on the real economy might not be that large," Mr. Marion says. "Animal spirit, be that of corporations or investors, is being tamed by both cyclical uncertainty and strong structural undercurrents."

Uncertainty will have to work itself out. But Mr. Marion's point about structural issues can only be addressed by a group that so far has been left out of this debate: Finance Minister Jim Flaherty and his provincial counterparts.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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