If "cash is king", which ASX company wears the crown? The fundies weigh in

Tue 20 Jun 23, 11:33am (AEST)
House with cash and money
Source: Shutterstock

Key Points

  • Companies with strong cash flow are more likely to survive and thrive in difficult economic conditions
  • In recent years, investors have become more focused on capital management and want to see companies allocate capital wisely to maximise shareholder value
  • The Lottery Corp, Macquarie and Ansell were among the top companies for capital management, according to MarketMeter

How many times have you heard the phrase "Cash is King" in your investing journey? Artificial intelligence (AI) may be the market's hottest buzzword right now, but strong cash flow will always separate the survivors from the failures. 

Now we are in an environment where inflation is high and interest rates are on the way back up to historically normal levels, a disciplined approach to capital management will become more important than ever.

Companies that are being forced to raise cash have been punished by the market, leading professional investors to choose companies with strong balance sheets and a lot of cash in the bank. 

Case in point, when asked which company has the best capital management policy going forward, the winning company recently increased its target dividend payout ratio and continues to remain well below its target leverage ratio.

In this piece, I'll share the top 10 companies which fund managers deemed to have the strongest capital management policies in the market. Then, we'll get the views of Sage Capital Portfolio Manager Kelli Meagher.

In addition, Livewire and MarketMeter reached out to companies in the top 10 for their take on what strong capital management looks like. We were fortunate to connect with Janelle Hopkins - the CFO of REA Group, who is responsible for the group's finance and business services portfolio as well as its global investments.

What is MarketMeter?

MarketMeter is an interactive market insights platform that measures and benchmarks institutional investor perceptions of Australian listed companies, who find it is a reliable risk management tool to understand their performance in the eyes of institutional investors.

Using a combination of quantitative and qualitative research (in other words, both numbers-based and non-numerical) insights, MarketMeter helps gauge the sentiment of these professional investors. 

“That sentiment will ultimately affect a company’s share price, depending on what area of the company we’re talking about,” says Nicholas Coles, managing director and co-founder at MarketMeter.

Top 10 Companies for Capital Management

The list appears in order based on the results of the most recent MarketMeter research.

  1. The Lottery Corporation (ASX: TLC)

  2. Macquarie Group (ASX: MQG)

  3. Ansell (ASX: ANN)

  4. REA Group (ASX: REA)

  5. (ASX: CAR)

  6. Qube Holdings (ASX: QUB)

  7. Brambles (ASX: BXB)

  8. Commonwealth Bank (ASX: CBA)

  9. Medibank Private (ASX: MPL)

  10. CSL (ASX: CSL)

Fundie's Take

Kelli Meagher is one of Sage Capital's Portfolio Managers and is responsible for specific sector company fundamental analysis. Meagher has over 20 years’ experience as an analyst and portfolio manager across the Australian and US equity markets across small, mid, and large caps. 

LW: What did you think of the list generally?

Meagher: I would agree with most of this list. Macquarie’s allocation of capital has been very good over the last decade. They’ve sold capital intensive businesses like aircraft leasing, down weighted direct asset finance, while acquiring astutely into others like the green investment bank and shifted capital into higher ROE businesses like commodities trading.

CSL, Brambles and Ansell all have something in common - the long-term incentive schemes for management include a return on capital component. This means management are highly motivated to consider return on capital not just earnings growth when allocating capital to a project or acquisition. 

This is something we like to see as incentive structures generally drive management behaviour. CSL has a track record of generating returns well above its cost of capital on its investments and Brambles and Ansell are both active in managing capital through buybacks.

Commonwealth Bank has succeeded where a lot of other banks haven’t during the last 15 years. Balancing investment, adequate buffers and steady capital management policy while not foraying overseas like ANZ (ASX: ANZ) (Asia) and NAB (ASX: NAB) (UK) into lower returning markets.

Carsales and REA Group are both capital light, cash generative businesses that have a good track record of reinvesting the cash they generate into high returning growth avenues. Qube Holdings has been successful in monetising its investment in Moorebank and Medibank Private operates with a clearly defined target dividend payout and capital ratio framework.

I'm surprised to see The Lottery Corporation there as its only been a standalone company for a year so no real track record in capital management as yet.

LW: Looking at the list, what are some other companies that should have made the list? 

Meagher: I think Fisher and Paykel Healthcare (ASX: FPH) does a good job of balancing dividend payout and retaining earnings to invest for long term growth.

LW: How important is strong capital management to your overall investment process?

Meagher: Capital management is one of many factors we look at but a very important one as ultimately return on capital is what drives shareholder value creation over the long term. 

REA's View

Janelle Hopkins is the CFO of REA Group. She joined REA Group from Australia Post, where she was the Group Chief Financial Officer. Prior to Australia Post, Janelle held a number of senior roles at the NAB and Deloitte. 

LW: Why do you think you have been ranked so highly by investors when it comes to capital management?

Hopkins: We have historically had a strong focus on delivering positive operating jaws with revenue growth in excess of cost growth. We have demonstrated an ability to manage our costs closely, responding to changing market conditions as required, while balancing investment in the company’s longer-term growth.

LW: REA has typically been able to generate outsized returns on capital. How has it managed to do this?

Hopkins: We have continued to invest to provide a superior consumer and customer experience, while maintaining a disciplined approach to cost management and capital allocation.

LW: The company has also shown an ability to retain and generate high returns on relatively large proportions of profits. Is this a key focus, or a natural consequence of expanding into new markets?

Hopkins: We have a strong focus on generating high returns for shareholders, investing in innovation and new products to drive yield growth, and prudently managing our cost base through cycles. We do this while also investing in future growth through expansion into new and adjacent markets, where returns reflect the early stage characteristics of these investments.

LW: What will REA be doing over the next 12-24 months to maintain its positions towards the top of this ranking?

Hopkins: We will continue our disciplined approach to cost and capital management, while investing in product and innovation to drive longer-term growth.

A closer look at REA Group

Screenshot 2023-06-19 at 11.02.46 am
Source: Market Index

Director trades: Who is buying and selling at REA Group?

Screenshot 2023-06-19 at 11.03.37 am
Source: Market Index

This article was first published for Livewire Markets on Monday, 19 June 2023.

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Written By

Hans Lee

Content Editor

Hans is a Content Editor at Livewire Markets and Market Index. He created Signal or Noise and helps write the LW-MI Morning Wrap on Tuesdays and Thursdays.

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