Firms with US$5t in cash set to splurge: Janus

New York

COMPANIES look poised to start splashing out some of the cash they hoarded during the coronavirus pandemic, unleashing a flood of capital spending and payouts to shareholders, according to a report by Janus Henderson Investors.

Firms hold record cash reserves of US$5.2 trillion, after adding US$1.1 trillion to their "war chests" during 2020, the investment management firm said. That amount was almost twice the sum of the previous five years combined.

Companies took on record amounts of new debt in 2020 to build a liquidity cushion as governments shuttered swathes of the economy to limit the spread of the virus. Firms have so far been thrifty with those funds, and raised little additional debt in 2021 to date, leaving them free to put their cash to work as economies emerge from the pandemic.

"An investment boom is highly likely after the Covid-19 freeze," Tom Ross and Seth Meyer, fixed income portfolio managers at Janus Henderson, said in the report. "This will account for a large portion of the reduction in cash balances this year but share buybacks and higher dividends will be part of the story too."

The resulting spending explosion will cause net debt to increase, even if the total remains broadly flat, Janus said. Net debt, which represents a company's total debt minus cash, is set to rise by US$500 billion to US$600 billion this year to almost US$9 trillion in the asset manager's corporate debt index. Net debt is a key metric of balance sheet health, used in rating companies' ratios that measure companies' creditworthiness.

The positive flip side is that the prospect of higher economic growth promises better cash flow and improved debt leverage ratios. This, combined with continued central bank stimulus and low default rates, prompts the portfolio managers to look for opportunities among rising stars, or companies upgraded from a junk rating to high-grade.

Janus favours food and beverage companies, such as Kraft Heinz Co, and carmakers, such as Ford Motor Co, as well as opportunities in the energy and consumer sectors, the firm said. BLOOMBERG

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