Current headlines are replete with stories of governmental fiscal difficulty. Greece and Ireland have had to be rescued by the European Union, with perhaps more countries to follow. Britain has moved aggressively to reduce its Government spending while the United States grapples with its own ballooning deficit. Even Canada, which went into the most recent recession with a relatively sound balance sheet, must address staged deficit reduction.
In contrast, the corporate world is in much better shape. Debt levels of public companies are at historic lows and a significant number of companies continue to generate strong free cash flow in a relatively benign economic environment. As a result, there is currently over $1 trillion of cash and short-term investments sitting on the balance sheets of North American non-financial companies.
A central plank in our investing philosophy is to “track the cash”. In doing so, we note that over 300 North American publicly traded companies increased their dividends in the third quarter, up 50% from a year ago. In addition, U.S. and Canadian corporations have bought back close to $150 billion of their shares during the first half of 2010, an annual increase of about 150%. Both dividend increases and share buy backs are critical to enhancing shareholder value over the long run.
The current divergence between the financial health of governments and the corporate world has rarely been more stark. We take heart in the fact that political leaders in the developed world are now addressing these problems in a serious manner. While deficit reduction programs may have a short-term negative effect on economic growth, we believe it will put the global economy on much sounder footings.