Is corporate South Africa hoarding cash? The answer, according to new research by Intellidex, is “no”.
Intellidex studied the balance sheets of the largest industrial and mining companies listed on the JSE and found that over the last 10 years, cash balances have fluctuated between 6.4% and 10.2% of total assets, and in the most recent year were at 7.8%. This is considerably less than other countries, where cash balances of large companies are usually over 10%.
The report reveals that the sample group held R765bn worth of cash – up from R154bn 10 years ago – and that while this appears to be a significant growth in cash balances, this can be explained by a range of factors.
Stuart Theobald, Executive Chairman at Intellidex and a co-author of the study said at the launch of the report: “After adjusting for inflation, cash holdings have grown by 11% a year, but much of this growth can be explained by the depreciation of the rand and the overall growth of companies.”
Many of the companies in the study have operations around the world and so hold cash balances in hard currency. In 2007 the rand was R7.29 to the dollar; by 2016 it had depreciated to R16 to the dollar. This means that every $100 of hard currency holding would have increased from R729 to R1,600 over the period, an annual growth rate of 8.18%.
“While it suits some to talk of cash hoarding and investment strikes, the evidence simply doesn’t support this. Companies are generally holding no more cash than they always have when seen in the context of their overall balance sheets,” said Theobald. “To the extent that there is variation in cash holdings of companies, this is strongly correlated with the economic cycle. Companies increase cash holdings when the economy is performing poorly, showing that they take a cautious stance in the face of difficult conditions. This ensures they don’t find themselves with a shortage of cash if revenue comes under pressure, something that would be damaging for those companies, their suppliers and employees.”
The study showed that capital expenditure by companies has been substantial, and has not diminished. The 85 companies studied collectively invested R694bn in the 2016 financial year. The amount invested in the last five years was considerably more than the preceding five years. Co-author of the study, Intellidex senior analyst Orin Tambo, said “The argument that capital expenditure has been declining simply is not true. The data is clear that companies have continued spending, both on expansion and replacement investment.”
The study also found that companies save cash in order to invest in replacement capital spending – so to replace plant and equipment as it wears out. Much of the cash held by companies represents savings for this purpose. It also found that company debt levels have increased over the last 10 years and some companies have increased liquid assets in order to manage the overall risk of their balance sheets.
An alarming finding was that in the case of mining companies, the return on capital is currently lower than the interest companies can earn on cash. This means that it is more profitable for such companies to hold cash than it is to invest – to invest cash into mining operations will reduce the value of the enterprise. Shareholders in mining companies are better off if the companies don’t invest. “We should not want companies to invest when it won’t earn the returns required to justify the risks. If they do that, they are actually destroying value in the economy, which does not help anyone,” says Theobald.
The study was funded by Business Leadership South Africa (BLSA) but conducted independently by Intellidex.
Bonang Mohale, CEO of BLSA, said; “The findings of this research have effectively busted the dual myths of ‘investment strikes’ and ‘corporate cash hoarding’. It’s clear that South African businesses continue to invest in South Africa and hold cash reserves at appropriate levels. Like in any country, South African businesses are structuring their balance sheets responsibly in response to a weaker economy and a lack of policy initiative from Government. Government can change the equation by promoting consistent policy that supports economic growth. A credible outlook for the economy combined with regulatory certainty and political stability will inevitably lead to more investment.
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Intellidex is a leading research and consulting firm that specialises in capital markets and financial services. Its analysis is used by stockbrokers, regulators, lawyers and companies looking to understand capital markets in Africa. Its market research is used by banks, fund managers, stock brokers, wealth managers and other financial service providers to understand their market places. It also publishes highly influential assessments on the retail and institutional stockbroking industries, private banking and various ad hoc reports on aspects of the South African and other African economies.
Business Leadership South Africa (BLSA) – is an independent association whose members include the leaders of some of South Africa’s biggest and most well-known organisations. Through this forum, South Africa’s business leaders engage key players in South African society, including civil society and labour to exchange ideas in our national interest, and to create effective dialogue with government and other stakeholders.
The organisation is focused on three core activities, all of which combined with the #BusinessBelieves Contract with South Africa and the Integrity Pledge, will help to facilitate a better and inclusive South Africa in the future.
• Advancing a modern, inclusive and growing economy;
• Upholding the Constitution and protecting the integrity of the state; and
• Demonstrating that business is a national asset, and is central in addressing poverty, unemployment, economic injustice, workplace transformation, and racism.