Carney Warns Suncor, Tech on Dead Money: Corporate Canada
Suncor Energy Inc. (SU) and Teck Resources Ltd. (TCK/B) lead Canadian companies sitting on record cash reserves, and Bank of Canada Governor Mark Carney wants corporations to invest this “dead money” or pay it in dividends.
Suncor, the country’s largest energy company, had C$5.17 billion ($5.2 billion) in cash and marketable securities in the latest quarter, top among non-financial companies that have a market value of more than C$1 billion, according to data compiled by Bloomberg. The Calgary-based company has a dividend yield of 1.64 percent, below the average of 2.58 percent.
Excluding financial firms, corporations hold cash and short-term securities of about C$526 billion, or about 30 percent of gross domestic product, said Craig Wright, chief economist at Royal Bank of Canada. That compares with about 10 percent historically, he said.
“The level of caution could be viewed as excessive,” Carney told reporters in Toronto on Aug. 22. “Their job is to put money to work, and if they can’t think of what to do with it they should give it back to their shareholders.”
Companies such as Suncor are being urged to support the economy amid a pullback by consumers, who pushed the ratio of household debt to disposable income to a record 154 percent in the first quarter. Retail sales unexpectedly fell in June, adding to evidence the economy may have slowed in the second quarter more than the central bank forecast.
“Carney would like to see a bit more business investment than the accumulations of household debt but you only have one instrument and you can’t control how people use it,” said David Tulk, chief Canada macro strategist at TD Securities in Toronto. The stockpiling of cash “is something that contributes to a sluggish recovery.”
Eliminating the net financial deficit of households will “eventually leave a noticeable C$50 billion gap in our economy over two years,” Carney said, according to the text of his speech to the Canadian Auto Workers Union. “This gap can only be sustainably filled by additional exports and business investment.” Carney didn’t name specific companies.
Cash on Canadian company balance sheets has surged to three times the historical average while productivity growth, driven largely by corporate investment in machinery and equipment, trails the U.S., Canada’s biggest trading partner. Canada’s productivity growth averaged 0.2 percent over the past five years, compared with 1.8 percent for the U.S.
“Canada has lagged the rest of the world in productivity for a number of years now and this should be an ideal time if you are a Canadian company to be buying equipment for the future,” said Craig Porter, a portfolio manager at Front Street Capital Inc., which runs C$2.4 billion.
Suncor said the current economic environment and recent commodity price swings make it “prudent” to have cash on its balance sheet, spokeswoman Sneh Seetal said. Half of Suncor’s C$7.5 billion budget for 2012 is geared toward growth projects. The company increased its dividend in May and is almost done buying back C$1.4 billion in shares this year, she said in an e- mail.
“Our intention is to invest significant capital over the next decade in order to grow the company, while also steadily increasing the cash we return to shareholders through dividends and share buybacks,” Seetal said.
Teck Resources has C$3.64 billion in cash and marketable securities, with a dividend yield of 2.69 percent. The world’s second-largest exporter of coal used in steelmaking refinanced at high interest rates in 2009 to replace short-term debt it used for its C$13.8 billion takeover of Fording Canadian Coal Trust in 2008.
Vancouver-based Teck, whose debt rating was cut to junk by Moody’s Investors Service after the Fording transaction, regained its investment-grade rating in 2010. Chris Stannell, spokesman at Teck, declined to comment.
“There are two extremely good reasons why they are holding a lot of cash at this moment,” said Bill Hochmuth, a senior investment-grade debt analyst at Thrivent Financial for Lutherans, which had $75.8 billion under management last year, including Teck bonds. “They have capital needs for expansion plans and given the volatility in the metals industry on a global scale, being conservative is a better way to be.”
George Weston Ltd. (WN), the owner of the Loblaw’s grocery chain, has C$3.6 billion in cash and a 2.3 percent dividend yield, according to Bloomberg data.
George Weston began holding a “significant” amount of cash to ride out challenging economic times in late 2008 and 2009, Geoffrey Wilson, senior vice president, financial control and investor relations, said in a phone interview.
The parent of Loblaw Companies Ltd. gave C$1 billion back to shareholders through a special dividend two years ago and is “actively” looking to invest the remainder in other companies to grow, Wilson said.
Loblaw will spend C$1.1 billion on such things as new stores and capital refits this year, and Weston is building new bakeries, “so we are investing heavily in Canada,” Wilson said.
Suncor shares have increased 6.2 percent this year in Toronto, while Teck has dropped 20 percent and George Weston has fallen 7.4 percent.
Carney is “barking up the wrong tree,” on companies’ use of cash, said John Stephenson, who helps manage C$2.7 billion at First Asset Investment Management Inc.
“Companies are seeing that really every region in the world is slowing or at least not growing very fast, and we are disproportionately weighted to the energy and resource sector,” Stephenson said yesterday in a telephone interview. “When you have got the growth rate slowing in Asia so dramatically, I think its worrisome, and I think if I were making the decisions I would be hoarding cash too.”
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