Potash Corp., CP Rail two BIG cash cows

Potash Corp. of Saskatchewan Inc. and Canadian Pacific Railway Ltd. are two of the world’s biggest cash cows, says a new report from Citigroup Global Markets.

The two Canadian companies are part of a list of 50 “highly profitable, capex-light global companies” that return more to shareholders than they reinvest in their businesses.

“Our cash cow strategy is designed to exploit the market’s ongoing preference for capital distribution over capital investment,” said Robert Buckland, global strategist at Citigroup.

Other names on the list include international giants such as Tata Consulting Services Ltd. and Vivendi SA, as well as McDonald’s Corp., Coca-Cola Co. and Apple Inc., which Buckland calls the “classic cash cow” at the moment. “Apple does not need to reinvest the majority of its remarkable cash flow back into its business,” he said. “In 2014, Apple spent an impressive US$16 billion on R&D and capex, but it paid out an even more impressive US$56 billion in dividends and share buybacks.”

Buckland acknowledged some market participants find Citigroup’s cash cow strategy cynical because feeding the preference for capital distribution versus capital investment stunts future earnings and economic growth. But he doesn’t see it that way.

“While we have sympathy with this view, we would point out that many of the companies in our capex-light basket are growing well enough, but they don’t need lots of capex to drive that growth,” he said. “Of course, strong capex is a good thing for economic performance, but the TMT (technology, media, telecommunications) and commodity stock experience has shown us that it is not necessarily good for shareholder returns.”