Monday, July 22, 2013

Canada's Corporate Cash Hoarders Pt. 2

Way back in February, I took a brief look at Canada's corporate world and their cash reserves.  This issue was brought to Canadians' attention during the summer of 2012 when Canada's recently central bank head honcho, Mark Carney, shook a well-manicured finger at Canada's corporate sector for sitting on piles'o'cash.

Estimates suggest that Canadian corporations are sitting on between $560 and $600 billion in cash, up 25 percent since 2008 and up 100 percent over the last 10 years.  To put this number into perspective, Canada's corporate sector is sitting on roughly one-third of Canada's cash reserves.

Here is a who's who of Canada's corporate cash kings:

Some companies are citing the near collapse of the corporate debt and stock markets during the Great Recession as the reason why they are sitting on mountains of cash, after nearly getting burned, it seems like the prudent thing.  However, analyses show that this corporate cash hoarding has been going on for decades as you will see below.

While sitting on a pile of cash can be a good thing, it can also work against a corporation since, in a corporate buyout, a company's own cash reserves can be used by an acquirer to fund part of their acquisition, particularly in an all-stock deal.  But then again, we all know who gets rich in corporate acquisitions, don't we?

Unfortunately for shareholders, this cash is not being returned in the same proportion as it is being saved.  Historically, 40 percent to 50 percent of surplus cash (i.e. pure profit) is returned to shareholders in the form of dividends.  In recent years, this has dropped to 35 percent.

This is not just a problem in Canada.  Corporations in Japan are sitting on $2.8 trillion in cash reserves, up a significant 75 percent since 2007.  The global situation is similar as shown on the black line on this graphic from a study by Loukas Karabarbounis and Brent Neiman:

Here is bar graph showing the trend in corporate savings levels for 31 countries showing that corporate savings rose in 22 our of 31 countries:

Here is a bar graph showing the trend in the corporate labour share (the share of global corporate income paid to labor) for 39 nations showing that the corporate labour share dropped in 29 out of 39 countries:

Globally, corporate savings rose by 20 percentage points at the same time as the corporate labour share dropped by 5 percentage points between the mid-1970s and the late 2000s or, in other words, corporate savings rose on the backs of dropping payouts for labour.  This conclusion can be drawn because dividend payments to shareholders did not increase by more than the increase in corporate profits and the size of the corporate sector as a whole did not change relative to total economic activity.

The growth in corporate cash reserves comes at the same time as Canada's corporations have been the beneficiaries of lower and lower taxation.  Apparently, it's way more sexy to save up those profits than it is to risk investing in new machinery, manufacturing facilities and research and development, activities that create jobs for all Canadians.

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