(Bloomberg) -- Investors will typically demand that a company find ways to productively use cash or return it to shareholders through higher dividends or buybacks. What they don’t like is for management to sit on a mountain of it.
Here is a chart showing how Toyota Motor Corp. has kept a big war chest for acquisitions or a buffer for mistakes even as its return on invested capital (ROIC) -- a measure of how well a company is using its money to generate returns -- has declined for the past three quarters when compared to the cost of that capital. Toyota had cash, equivalents and short-term investments of 5.9 trillion yen ($53 billion) as of March 31, according to data compiled by Bloomberg.
The slide is taking place at a time when cash and marketable securities as a percentage of market capitalization is on an upward trend. Toyota, Asia’s biggest automaker by market value, is scheduled to report first-quarter earnings later Friday.
“If returns are below cost of capital then they should return rather than reinvest,” said Joshua Crabb, head of Asian equities at Old Mutual Global Investors in Hong Kong.
As this other chart shows, smaller rivals including Honda Motor Co. seem to be in much better health for raising dividend payments than Toyota, according to Bloomberg’s Dividend Health Score, which is calculated based on company fundamentals and credit rating companies.
“With robust cash flow generation through the cycles, Toyota can afford to return more cash to the shareholders in the form of buybacks or dividends,” said Steve Man, an analyst at Bloomberg Intelligence.