Canadian companies should spend on productivity-enhancing capital, not dividends
The Institute showed in Bringing “Dead Cash” Back to Life that there was excess cash accumulation in Canadian companies between 2002 and 2011. Canadian firms’ cash-to-net asset ratio rose from 7 percent in 2002 to 12 percent in 2011 while during the same period, US firms’ cash-to-net asset ratio remained much lower at 6 percent.
The Institute emphasized the need for companies to put their excess savings toward productivity-enhancing investments in order to close the prosperity gap between Ontario and its North American peers. However, Canadian corporations have instead opted to pay out a greater share of their excess cash in dividends since 2011.
The ratio of Canadian corporations’ new capital accumulation to net-income has increased significantly since 2011. However, net-income in this ratio does not include money spent on dividend payments. When one adds back dividend payments into corporations’ net-income, this upward trend disappears. The ratio of Canadian corporations’ new capital accumulation to net-income, including dividend payments, has averaged 0.71 since the first quarter of 2011, markedly lower than the 1990s average of 1.30. This is particularly concerning given that Canada is already lagging the US with investment in machinery and equipment (M&E), research and development (R&D), and information and computer technology (ICT), on a per worker basis.
Shareholders are residual claimants of after tax profit; they have a right to a corporation’s after tax profit once all prior obligations have been met by that corporation. A rise in dividend payments relative to capital investment suggests that Canadian corporations are apprehensive about advancing their capital stock, despite having the funds to do so. The hesitancy of corporations to invest in capital is often cited to be heavily influenced by uncertain future domestic demand. But, if Canada and Ontario want to improve upon, or at the least maintain, their competitiveness in the global economy, corporations cannot let this uncertainty hold back their capital investments.
Employment in low and medium value-added product manufacturing has declined significantly since the early 2000s, and off-shoring of low-cost sectors may continue. In order to remain globally competitive and maintain employment levels we must continue developing our manufacturing and service sectors into high value-added producers. This requires substantial investments in both productivity-enhancing and human capital. Discounting short term profitability in favour of long term capital investment is therefore important. Encouraging corporations to do this has proven to be a tough task. Yet, the Institute continues to believe that time sensitive tax-credits for investment in ICT and M&E, as well as, a new system of management evaluation that benchmarks innovation investment to the highest performing corporations, would be beneficial. As per Barton and Wiseman’s recent article in the Harvard Business Review, the Institute would also like to encourage large investors to demand long-term metrics from corporations, as this would help move decision makers’ incentives away from the stock market and toward ensuring long term competitiveness.
 Institute for Competitiveness & Prosperity, White Paper, Bringing “dead cash” back to life, March 2013, p. 4.
 Task Force on Competitiveness, Productivity and Economic Progress, Twelfth Annual Report, Course Correction: Charting a new roadmap for Ontario, November 2013, p. 21.
 Institute for Competitiveness & Prosperity, White Paper, Bringing “dead cash” back to life, March 2013, p. 3.
 Dominic Barton and Mark Wiseman, “Focusing Capital on the Long Term,” Harvard Business Review, January – February 2014, p. 8.