We’ve all seen the headlines on the six o’clock news. Around the world, governments are struggling to balance their books. And many of them don’t seem to be succeeding very well.
The most notorious example at the moment is Greece. The Government of Greece has a $350-billion debt, which represents roughly 150 per cent of its entire Gross Domestic Product (GDP).
To put this in context, Canada is currently about $560 billion in the hole. But because our GDP is in the ballpark of $1.3 trillion, our debt-to-GDP ratio is actually about 47 per cent, or less than a third of the same ratio in Greece.
While a $560-billion debt doesn’t exactly inspire confidence, we’re also looking pretty good compared to places like the U.S. (whose $14-trillion debt represents 100 per cent of its GDP) and Italy (where the debt is around 120 per cent of GDP).
The reasons behind these almost unimaginable levels of debt are as well known as they are widespread. Governments across the globe are facing a perfect storm of aging populations, soaring health care costs, increased spending on benefits due to the recession, and program spending that is steadily outpacing revenues.
Clearly, we all have some tough choices to make. And as the debate in the U.S. Congress over raising their debt ceiling proves, making those choices is not going to be easy.
But for the individual investor, these turbulent times are not without a few silver linings. Up against this backdrop of public-sector red ink, for example, is a corporate world that is almost literally awash in cash.
Many of the world’s biggest publicly-traded companies haven’t had this much cash on their balance sheets since the end of the Second World War. Corporate profits are, in general, pretty healthy. As a result, the notion of what constitutes a safe investment – and what doesn’t – is being turned on its head.
In Greece, for instance, a company with a good balance sheet can borrow money at a substantially better rate than its own government. In the U.S., Berkshire Hathaway recently issued a bond that carried a lower interest rate than U.S. treasuries.
As the reality of this new state of affairs sinks in, savvy investors are beginning to look at the numbers, and coming to believe that a huge wad of cash on a company’s balance sheet just might be as good – or better – a “guarantee” than a promise from a government that can only afford to repay you if they can borrow it from someone else first.
Some of this is good news for stock holders. Big companies, desperate to find something to do with all their surplus cash, are buying back their own stock at a tremendous rate.
Ever heard of a little retail outlet called Walmart? The Walton family has evidently decided that there is no better home for their billions than Walmart stock. At the rate they’re currently buying, it won’t be long before they will once again own the majority of the shares in their namesake company.
Oil giant Exxon is similarly buying back its stock at a rate that, if kept up, will see every single publicly-traded float for the company retired within the next ten years. And Microsoft – whose shares are trading at the same price today as they did ten years ago, despite the fact that their earnings have doubled – is dumping $2 billion of free cash onto its balance sheet on a monthly basis.
The same story is being repeated across most of the multi-national blue chip stocks. In virtually every industry, big companies are deciding that their stocks are so attractively priced that the best thing they can do with their cash is to gobble them up, before the fire sale comes to its inevitable end.
What does this mean for you and I?
When a company you own buys up its own stock, the remaining shareholders get a larger share of the earnings. If the company in question had, say, 10 million shares outstanding, and it buys back a million shares, then the same earnings that used to get spread over 10 million shares now get spread over nine million shares. This gives each of the remaining shareholders a larger piece of the pie.
You might think that this trend would convince the investing public to put more of their hard-won savings back into stocks. In the U.S. market alone, for example, stocks are trading at around 8.5 times cash flow – a pretty good deal, when you consider that ten-year U.S. treasuries are yielding about 0.5 per cent less than the dividend yield on the Dow Jones dividend index.
Unfortunately, after all the ups and downs of the past few years, risk-weary investors are still largely deciding to leave their money on the sidelines. This is a shame, because those who are willing to accept that reward always comes with some measure of risk, could do a whole lot worse than follow the lead of all those companies who are voting with their wallets, and deciding that there’s no better place in the world for their cash right now than their own common stock.
Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. He is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.
For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.
All material by Alan MacDonald. Alan MacDonald is an Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.
Richardson GMP Limited, Member Canadian Investor Protection Fund.
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
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