Wall Street pundits talk about it all the time: corporations are sitting on record levels of cash.
According to Moody’s, non-financial corporations are sitting on around $1.5 trillion worth of cash.
Bulls argue that this means companies could unleash this cash in the forms of capital expenditures, mergers and acquisitions, dividends, and share buybacks.
However, Citi High Grade Credit Strategist Jason Shoup thinks this assessment is a bit short-sighted.
“When it comes to popular finance myths, cash hoarding by corporates may be one of the most perpetuated,” he says. “What’s misguided is the narrative, in our view, in particular among equity investors. What we most take issue with is the implication that corporates have lots of cash to return to shareholders. Indeed, there’s plenty of data to the contrary that challenges the prevailing notion that corporates are the picture of good health.”
Shoup argues that we need to consider cash relative to other financial metrics.
For example, he looks at cash relative to debt, which is considered a proxy for a company’s a ability to service its liabilities.
“That ratio is rapidly plunging and, at least to our minds, implies that further shareholder friendly behaviour will likely be funded with more borrowing at the margin,” he writes.
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