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Cash is king, we're told. Look for companies with strong cash flow. Invest in outfits with lightly-geared balance sheets. Debt is the death knell. It seems barely conceivable that a year ago, the reverse was true. Strong balance sheets were for fuddy-duddies, cash flow for softies. Why have all that dough sitting around on your balance sheet, Mr Finance Director? Hand it over to shareholders, and fund your business with cheap debt instead!
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Such gung-ho balance sheet management was partly to fend off the threat of takeover by private equity - itself generously funded by what at the time seemed inexhaustible debt financing. And one popular mechanism for returning cash to shareholders was the share buy-back, which made perfect sense when share prices were rising. But now, as Alistair Blair highlighted last week (see Where are the bankers' bodies?), many banks are now issuing new shares at a fraction of the price they paid for old ones.
And it's not just the banks. As expected (see Rights and wrongs, 30 April), non-financial companies with 'overly efficient' balance sheets are now having to come to shareholders with caps in hand. Furniture retailer Land of Leather announced it was after £15m last week after its sales fell off a cliff. And now housebuilder Taylor Wimpey, which wanted to to plug a hole in its own finances, was sent away empty-handed by the City following the sharp downturn in the housing market. And with consumer confidence plugging new lows and profit warnings becoming increasingly commonplace, more cash calls can be expected from indebted cyclical firms.
At the same time, share buyback programmes are being halted. Trinity Mirror, owner of the Daily Mirror and Sunday Mirror newspapers, has stopped a £175m share buy-back programme £108m of the way through, in response to a sharp deterioration in the advertising market. And even well-financed housebuilder Berkeley has told shareholders it wants to defer the final £3 payment of a planned £12 per share return of capital.
It isn't that either take on what constitutes an optimal balance sheet is wrong, per se. It's just that the juxtaposition of two such divergent views over such a short space of time, makes us all look a bit short-sighted, and forgetful about how fast conditions can change.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
