Here’s Why Investors Check Company Spending During A Recession

Here’s Why Investors Check Company Spending During A Recession
Theodora Lee Joseph, CFA

over 1 year ago1 min

Higher rates push investors to be extra scrutinous about where companies splash the cash. After all, how a business spends money during different economic climates can be a telling indicator of everything from the health of its balance sheet to its dividend budget.

Investors generally don’t want to see companies spending on expensive long-term investments when a recession looms. They’d rather see a firm saving up cash to pad out its balance sheet instead, even though a recessionary period would make investing considerably cheaper.

Investors do want to see companies reward shareholders with dividends and buybacks during times of slow growth, according to data collected over the last two decades – just check out the dark blue line in the chart. To check whether a company can sustainably maintain or grow its dividend payouts, look for firms that can produce strong cash flows and balance sheets – and be wary of those that have historically cut dividends in bad times or are currently funding them from their balance sheets. Keep an eye out for companies with a relatively high “cash conversion ratio”: this is the proportion of its EBITDA – that’s earnings before deducting interest, tax, and depreciation – that it converts into operating cash flow. And instead of simply looking for stocks with high dividend yields, look for those that can sustain them: the VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF (ticker: TDGB, expense ratio: 0.38%) could be a good starting point.

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