Cash is a big deal because it’s easy to value. While a nuclear power plant or a tire factory may have market values that fall in a wide range, a firm’s checking account is pretty easy to get a handle on. And when that cash balance starts to balloon, it effectively provides a massive discount for shares.
In short, cash provides options. Firms with cash can opt to increase shareholder value by paying a dividend or initiating a share buyback. Plus, they have the ability to take advantage of pricey M&A opportunities and internal investments.
Firms without cash can’t.
The power of cash in your portfolio is a recurring theme. Since we last took a look at cash-rich firms back in March, the five names I talked about rallied an average of 11.6 percent — that’s around a third better performance than “buying the market” would have earned you.
Today, we’ll focus in on five of the firms that carry the biggest cash and marketable investment balances for investors.
Warren Buffett’s Berkshire Hathaway tops off the list thanks to a $40.6 billion cash position and an absolutely massive $135.4 billion stock portfolio. The positioning gives the Oracle of Omaha plenty of dry powder to drop on the next Geico or NetJets (just two companies under the Berkshire umbrella). That provides a hefty margin of safety for investors in 2012.
Ultimately, it’s probably most accurate to call Berkshire Hathaway an insurance company. While Berkshire’s subsidiaries include everything from prefab housing manufacturers to candy companies, insurance and reinsurance make up the lion's share of Berkshire’s performance. Despite the many pitfalls that insurers have faced in the last several years, Berkshire has managed to come out ahead, managing underwriting risks adequately and affording themselves a hefty profitability cushion. When interest rates start to come back around, the firm’s ability to earn should increase materially.
The big unknown is Buffett. At 82 years old, the investor’s days at the helm of his storied firm are clearly numbered. While he’s been planning for that for some time, hiring new investment managers to run Berkshire’s mammoth portfolio, for instance, it’s not clear if any successors will have the same golden touch that Buffett’s had.
Despite that, a huge cash position certainly helps to offset any risks that remain in this stock. After taking out any debt, cash and investments account for around half of Berkshire’s market capitalization.
That’s not a bad safety net at all.
It’s hard to discuss companies with cash without bringing up Apple. The Cupertino, Calif.-based company caught headlines in 2011 for having more cash than the U.S. government during the budget crisis, and the firm has been hoarding even more despite initiating a dividend payout with a 1.54 percent yield. That, by the way, is the first dividend payout that Apple’s enacted since all the way back in 1995.
Apple continues to be a Wall Street darling. While the nearly $700 price tag is enough to scare many investors away, there’s actually quite a bit of value left in this stock when all of that huge cash position is accounted for. The firm’s current price-to-earnings ratio of 16 isn’t particularly lofty considering Apple’s growth trajectory, but take out the firm’s cash and investments from its price (Apple has zero debt), and its adjusted price-to-earnings ratio (P/E) for the last four quarters drops to barely above 13.
That means that investors are pricing in less growth for Apple than they are in (more) boring blue-chips such as Johnson & Johnson.
The release of the iPhone 5 should be a good “aha” moment for investors. Despite the new phone being panned by many reviewers as not a substantial change from previous models, it has already smashed any sales records that Apple had set for a new phone launch. As long as Apple keeps bringing in dumptrucks full of cash, investors would do well to ignore the naysayers.
I’d expect to see a more aggressive return of value to shareholders in the next few quarters; with limited places to spend money, Apple’s best off paying its owners.
Technology stocks utterly dominate this list of cash-rich companies. Microsoft is another example of one. The Redmond, Wash.-based firm currently boasts a cash and investment position of $63.04 billion, offset by an $11.94 billion debt load. While it may have been unfathomable that dominant Microsoft would be playing a distant second fiddle to Apple among the sector’s richest firms just decade ago, Microsoft’s cash position is nothing to scoff at.
While Microsoft has been ceding market share to Apple’s Macintosh platform over the years, its Windows software still solidly the dominant operating system in the computer business. That success — and the success of other software packages like Office and its enterprise products — continues to be a cash cow for Microsoft, even if forays into other businesses (music players and cell phones, for instance) haven’t been nearly as successful.
There’s been a lot of speculation that Microsoft may buy beleaguered Finnish handset maker Nokia with some of its cash, but I think that’s unlikely, and even less good for Microsoft shareholders. While a partnership with Nokia is very beneficial for Microsoft in getting its mobile phone platform on retail shelves, Microsoft could build phones for a lot cheaper than the price that Nokia would fetch at a discount right now.
A nearly 3 percent dividend and a wildly lucrative Windows business should keep Microsoft investors happy for the foreseeable future as long as CEO Steve Ballmer doesn’t make any ill-advised acquisitions.
Cisco Systems is another cash-rich tech company that’s had some missteps in the past few years — but like with Microsoft, that doesn’t detract from the IP networking firm’s core business. Cisco is the world’s biggest supplier of computer networking hardware and software, a lucrative business that's continued to grow at breakneck pace during the recessionas demand for data-hungry technologies like cloud computing continues to swell across the globe.
That hugely successful enterprise business helps to offset the black eye that Cisco got from its consumer business. The firm shuttered its Flip video camera product line after taking losses, and it's since refocused its efforts on enterprise customers — a good move given the volume of competitors who have moved into the space in the last several years. Because Cisco basically failed in the consumer market, its missteps were more conspicuous than most — but here’s another case of a bargain-priced company that investors are eschewing.
For starters, Cisco carries $48.7 billion in cash — accounting for more than a quarter of the firm's market capitalization once its debt load is taken out. Even more significantly, Cisco generates more than $1.50 in free cash flows each year, paying for its near 3 percent dividend payout while leaving plenty of cash to put away.
Again, investors will need to keep a close eye on how management decides to deploy that cash, but a dividend hike would be a good start here too.
Finally, we’ve got Google.
Google carries more than $44 billion in cash and investments, offset by a $6.2 billion debt load. That number has continued to swell in spite of a large number of pricey acquisitions — Google’s paid search portal just happens to be lucrative enough to give management the ability to write checks with impunity. The Mountain View, Calif.-based firm owns its namesake search site in addition to properties such as YouTube, Gmail, and Motorola Mobility.
Google’s foothold in the search business is impressive. The firm owns more than 60 percent of the fragmented market, dwarfing rivals who are trying to take share from the firm. Google’s scale affords it the ability to dump money into other projects. Sometimes, the results are positive — Gmail and Google Maps are examples. Other times, they’re less positive. I’d argue that the firm overpaid for Motorola Mobility, an investment that’s going to take some time to pan out.
Hopefully, the challenges of generating meaningful returns on investment are sending a signal to management; it makes more sense to return value to shareholders through other means (at least in part). Google may be the next mammoth stock in Silicon Valley to initiate a dividend payout.
—By TheStreet.com Contributor Jonas Elmerraji
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At the time of publication, Jonas Elmerraji had no positions in stocks mentioned.