Firms splash cash to stay safe

A TREND among large Australian companies to hand back cash to shareholders is gathering pace.

A TREND among large Australian companies to hand back cash to shareholders is gathering pace, as boards are reluctant to commit to major investments.

This week rail freight operator Aurizon became the latest to announce a cash splash to shareholders outlining plans to spend up to $500 million buying back its shares over the next 12 months.

This follows heavyweights such as Telstra and Wesfarmers which have announced share buybacks worth $1 billion each, and biotech company CSL’s $950m buyback — its seventh since 2008.

“Our long-term capital requirements are not around the corner,” an Aurizon spokesman said. “In that scenario, we think returning cash to shareholders will be value accretive.”

As coal prices have slumped, Aurizon has shelved planning around developing major railroad projects in Western Australia’s Pilbara and Queensland’s Galilee Basin.

Even so the company — which was previously known as QR National — reaffirmed its guidance, telling shareholders at its annual meeting that it expects to move up to 220 million tonnes of coal and 23m tonnes of iron ore in the 2015 financial year.

Many Australian companies have built up large cash reserves through years of cost control but company boards are reluctant at looking for growth opportunities through acquisitions and major investments.

“Australian companies can’t afford to be too risk-averse in their low GDP growth environment. They need to challenge themselves to look out for domestic and offshore opportunities, or get left behind their global peers,” said Graeme Browning, a partner at consulting firm Ernst & Young Australia.

According to the latest quarterly business confidence survey of the top 300 companies by National Australia Bank, larger firms are anticipating sluggish domestic demand to reflect slower pace of economic growth and as a result long-term capital expenditure plans remain soft.

Analysts also blame shareholders’ focus on short-term returns for putting pressure on companies to maintain dividend yields.

A report last month by Boston Consulting Group found that Australian companies paid out almost twice as much in dividends as their global peers so far in 2014, but have lagged in earnings per share growth. Another report by Credit Suisse showed that Australia’s top 200 companies increased dividends by $5 billion in the past 12 months, but cut capex ratios to multi-year lows.

Reserve Bank governor Glenn Stevens highlighted the issue earlier this year when he said the corporate sector was too risk-averse.

“Buybacks are important for capital management, but managements need to look for growth opportunities and shareholders need to be patient for the medium term,” Mr Browning said.