Saturday, August 4, 2012

Income trusts overcame this and many other problems


Who’s sitting on all the cash? Corporate Canada

We’ve all heard about Corporate America’s still-growing mountain of cash. But in relative terms, Corporate Canada is sitting on Mount Everest.

Indeed, Canada’s corporate stash is so big that if even a small fraction of it were deployed, it could significantly enrich investors and jump-start the country’s economy all at the same time, argues Capital Economics.

Paying dividends“Corporate businesses are flush with cash, which they still seem hesitant to deploy, presumably due to the uncertain economic outlook,” said David Madani, Canadian economist for the London-based research firm. “This obviously leaves scope for firms to increase dividends, which could boost personal income and consumption significantly.”

In a recent research note, Mr. Madani said Canada’s non-financial-sector corporate cash balances stood at $526-billion at the beginning of 2012 – up 42 per cent since the recession ended in mid-2009. Since the Canadian economy is roughly one-tenth the size of our U.S. neighbour, this Canadian cash pile, in relative terms, dwarfs the roughly $1.3-trillion (U.S.) in cash held by U.S. corporations.

Dividends have gradually been climbing as a percentage of Canadians’ income over the past decade; as dividends have climbed and Canadians have focused more attention on investing, and income investing in particular. Dividends now represent 5.3 per cent of personal disposable income. As a result, dividend increases have become a more significant source for personal-income gains.

If Canadian companies were to spend just 5 per cent of their cash hoard on dividends, that would dramatically increase total annual corporate payouts, to more than $80-billion (Canadian) from the current $56-billion. Mr. Madani calculated that this would boost personal disposable income by 2.5 per cent. Even if they were to spend only half that amount on dividend increases – 2.5 per cent of their massive cash pile – personal disposable income would still gain more than 1 per cent. That kind of disposable income gain would significantly accelerate consumer spending and investing.

Corporate misersOf course, there are other ways corporations could use extra cash to fuel growth, rather than pay their shareholders – but they haven’t been doing that, either. “Firms have been unusually reluctant to use [profits] to fund fixed capital expenditures,” Mr. Madani wrote. As a result, he said, the gap between undistributed profits and capital spending has widened dramatically. “If firms aren’t going to spend the funds, then transferring the money to shareholders would at least get the money circulating back into the economy again,” he said.


Dr Mike said...

Disposable income in the hands of the "people" is the only true way to stimulate an economy from the ground up.

Large corporate hoarding may give a major boost to CEO salaries & bonuses but the effect is limited---Lexus & Mercedes don`t need the help but Ford & Chrysler do

The background noise from the CEO`s whispering into the ears at the PMO has been a drain on the real economy.

It`s time to get back to common sense & funnel cash to those who spend it in the most effective way---you & I.

Dr Mike Popovich

don bool said...

According to Flaherty anyone who gets a return on their investments are coupon clippers.

Anonymous said...

Flaherty called income trust investors coupon clippers. Well Mr Flaherty ask any investor today after the 2008 financial mess do they want to clip their yielding coupons or bailout the greedy bankers and CEO's ??

And Mr Flaherty how is your coupon clipping double dip provincial and federal pension doing today !
You're all smiles !