Company Cash Piles Come Under Scrutiny

Companies will come under increasing pressure from the investment community to explain how they are dealing with cash on their balance sheets, according to the speakers at a policy forum today, held by the UK’s IR Society.

‘Of the companies we see, there is still an element of caution toward organic investment opportunities. But what we would say is that there has been an improvement,’ explained Tom Mann, an investment manager covering UK and European equities at Aberdeen Asset Management.

‘The focus in 2009 was about balance sheet repair and sorting out cost bases… that exercise is now done. From our perspective as investors, when we see cash building up on company balance sheets, particularly earning zero [per cent] over a period of time, that’s a real misuse of capital. We then start to agitate and ask, What are you going to do with that capital?’

As options, Mann suggested share buyback programs, increasing dividends, organic growth opportunities – particularly in the emerging markets – and M&A.

IR professionals will need to clearly articulate what a company’s strategy is regarding cash on the balance sheet, advised Gillian Sheldon, a senior managing director at Credit Suisse’s UK investment banking and broking division.

‘It is going to be very much down to communication,’ she said. ‘A number of my companies have got results coming up in February and March, and they are already thinking, quite rightly, How are we going to explain this?

‘On the one hand, you’ve got CFOs who have repaired their balance sheet and are very keen to demonstrate they have actually done something about this, and that negative carry isn’t an issue.

‘But on the other hand you’ve got CEOs who are saying Actually, I quite like this hoarding. So there is a balance to be struck. You need to give the investment community an understanding of where that money is going to go.’

The idea behind the policy forum was to give IR professionals the opportunity to review the prior 12 months, and look forward to potential challenges in the coming year.

Along with Mann and Sheldon, other speakers included Uzo Ekwue, an assistant fund manager at Newton Asset Management; Oliver Ralph, UK companies editor at the Financial Times; and John Dawson, the deputy chairman of the IR Society and former head of IR at a number of UK companies, most recently Cadbury.

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