- Cash today earns 5 per cent with no risk
- Stocks with dry powder should be treated differently by investors
Once upon a time – call it before 2022 – there weren’t many incentives for companies to hold on to cash. It didn’t earn anything, investors didn’t like management teams to let dry powder just sit there, generating a negative real return. Of course, cash is never a bad sign. But the point of equity investing is to get exposure to something a little bit more dynamic, improving the return on assets in the process.
If anything, investors preferred executives to extend and optimise their use of leverage. With the cost of capital so cheap, it made sense for most corporates to borrow, and put both cash and debt financing to use in pursuit of higher returns on equity. By contrast, there was little prestige in a big piggy bank.