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Rising Corporate Cash Levels

A post on the Globe Investor Market Blog by David Berman on Friday sparked some interest amongst a collection of friends over the weekend as a few of us debated the meaning of the statistic and its potential impact for investors.

The post highlighted a fact that since 2007 corporate cash balances had risen 18% with an estimated $340-billion in cash sitting on the sidelines within Canadian corporations in both cash and short-term deposits.

While a quote in the post highlighted that this heightened cash level may lead to more dividends for investors over the short-term my impression was that common sense would lend an investor to think that after two years or more of volatility corporations are likely to carry more cash because of uncertainty that exists in the market.

Capital was at a very high premium not so long ago and good management should be strategically accumulating larger reserves than normal in this economic environment.  The market, overall, isn’t cheap by many standards and other than Potash there haven’t been many mergers or acquisitions so far in the latter half of 2010.  This would lead me to believe that managers aren’t finding value in the market and are instead finding opportunities for organic growth through re-investment within their own operations.  This type of growth, depending on the industry, can demand a much higher cash level.

While it would be nice for Canadian corporations (our banks specifically) to reward shareholders with even a minimal increase in dividends as a show of our support my guess would be that cash reserves will remain high until a little more volatility hits the market and a second cleansing is initiated.  Leaner times may be ahead for Canadian corporations and the significant cooling of the Canadian housing market may be an early enough indication to many companies that they should form contingencies for the availability of cash if needed.

While cash doesn’t earn a spectacular return in this current market managers may be content to park returns into lower yielding short-term cash positions rather than risk the potential for restrictions on their ability to generate new capital if a second market decline occurs.

Recent moves by companies to raise their dividend could indicate an ability for others to begin returning cash to shareholders but likely dividend raises will be specific to certain companies in certain industries that have an ability to be less economically sensitive.

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