Walls of cash often prove less durable than the kind made of bricks and mortar. Prudent businesses build up cash or pay down debt when performance has been strong, lest it disappoints later on. That is the position of many large businesses as continuing eurozone turbulence – most recently manifested in Spain’s property crash – threatens to depress growth further. The dissipation of these reserves through cost subsidies during periods of tougher trading or, indirectly, through bank deleveraging mean that their impact is rarely as dramatic as suggested by such bald numbers as the $2tn of surplus liquidity reputedly lurking on the balance sheets of US and European companies at the end of 2011.
European politicians would it were otherwise. Most of them believe, with varying degrees of fundamentalism, that austerity is the only route to post-financial crisis stability and then growth. The implicit contradiction is that many of the tribunes of the people would nevertheless like companies to make the stimulatory investments seen as inadvisable for the public sector because of its higher indebtedness.
Unsurprisingly, company boards remain sceptical that their hurdle rates for investment can be surpassed when spiking yields for Mediterranean government debt point to a long period of turbulence and weak growth. For example, the UK’s Office for Budget Responsibility, an independent forecaster, expects output to grind along at below 3 per cent a year until 2015.
In a recent note, Morgan Stanley, the investment bank, argues that an improvement in the availability of credit is needed to stimulate investment even when company balance sheets are healthy. A loans drought weakens collective economic confidence, even among those who do not want to borrow, the argument runs. European banks are shrinking their balance sheets as they write down dud loans and seek to meet tougher capital requirements, so no recovery is likely soon. After the decade hubristically dubbed “nice” (non-inflationary, constantly expanding) come the years of collective paralysis.
Business has at least benefited from a recovery that came in the wake of the credit crunch and was propelled by such engines as restocking and unrepeatably rampant Chinese growth. UK corporate earnings before interest, tax, depreciation and amortisation as a percentage of sales rose from 9.9 per cent in 2008 to 15.4 per cent in 2011, but slipped to 13.5 per cent in the last quarter, according to the S&P Capital IQ database. The dread hand of mean reversion weighs heavily on the shoulder of business.
For bosses, investment cycles are overlaid by their own career plans. If you are not intending to stick around – or fear that increasingly assertive investors might provide you with an expedited exit – the temptation is to forget about capital expenditure and bolster payouts to shareholders instead. Similarly, no stock analyst ever got fired for short-termism. BT Group, the telecommunications company, recently suffered City criticism for raising its final dividend by 12 per cent. This increment was regarded as derisory when a higher total could have been achieved by the simple expedient of spending less on the rollout of faster broadband, a cost that promises to benefit both BT and the broader economy.
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Many billiions of the putative wall of cash have been returned to shareholders. There is plenty more to come. UK listed companies paid gross dividends of £68bn in 2011, according to Capita Registrars, the UK administrator of company share registers. This is a 19.4 per cent increase and the highest figure for five years and the company’s forecast for 2012 is £76bn.
Shareholders reasonably expect that a one-off gain by a company should mean a one-off payout to them. More broadly, extempore returns of capital are a signal that current rates of return. Share buybacks have been a sop to investors over the past couple of years, despite the reasonable objection that repurchases represent poor value when made, as is customary, during market rallies. Buybacks are automatically earnings enhancing and tax free for continuing investors, who are thus happy to ignore the critics.
Takeovers – another use for corporate cash – have by contrast been notable for their scarcity. Here, as with investment in organic growth, a heightened perception of risk is to blame. Meanwhile, private equity companies, reliable purchasers of publicly listed companies before the crunch, have suffered the double indignity of tighter credit and a boycott by equity funders of the weakest of their number.
Raising top-line growth through mergers and acquisitions is a long-standing, if unspoken, strategy of chief executives hungry for a pay increase. With that avenue blocked, they can at least expect the boost to remuneration that special payouts should deliver via bonus formulae shackled to total returns. But, as UK shareholders seize back the ownership that was always theirs for the taking, bosses can no longer look forward to the upward rebasing of their pay. All in all, for both executives and investors, there is just a hint of a doomed golden-age vibe to cash-rich 2012. It is appropriate that a remake of The Great Gatsby will be released this year.
Jonathan Guthrie is the FT’s City editor