5 Stocks That Are Swimming in Cash

Some say cash is king.

And today, many (The Economist, for example) are saying it loudly.

According to The Wall Street Journal, 64,000 companies bit the dust and filed for bankruptcy in 2008. And, terrifyingly still, credit markets are bracing for significant increases in corporate default rates in 2009.

For those companies that survived this first wave, the really bad news is that debt will still require repayment, employees will still want their paychecks, and electricity bills will still fall on their doorstep every month. Companies need cash -- and the ones holding a lot of greenbacks should do quite well.

I've found five companies that have tons of cash, but it doesn't really matter. Let me explain why.

Cash helps, no doubt
I think we can all agree that an adequate amount of cash on the balance sheet is an excellent defense for a company facing complete, financial destruction. Without cash on hand, not even General Electric (NYSE: GE  ) or Bank of America (NYSE: BAC  ) could survive ("too big to fail" aside). Bear Stearns went under not because of any insolvency but because it had no liquidity.

But there's a bigger problem.

You may be looking at the cash line on a company's balance sheet with the belief that companies with lots of cash will be the companies that can avoid bankruptcy, and therefore be properly positioned to succeed in the future.

Not so fast.

I agree -- to some extent. These companies probably won't go bankrupt (in the near term, at least), but it has nothing to do with how well the company can or will do in the future. That train of thought will steer investors into a classic mistake.

Show me the money!
I've selected five companies with market caps larger than $500 million and cash in excess of 30% of that market cap (which is a lot of cash!) to illustrate a simple point:


Market Capitalization (billions)

Cash and Cash Equivalents (billions)

Apple (Nasdaq: AAPL  )



Gerdau (NYSE: GGB  )



Electronic Arts (Nasdaq: ERTS  )



Sprint Nextel (NYSE: S  )



Sun Microsystems (Nasdaq: JAVA  )



Source: Capital IQ, a division of Standard & Poor's.

These are relatively some of the "richest" companies in the world. But that fact alone doesn't have any bearing on whether they make for good investments.

Market beaters? Maybe.
These companies could be burning through cash faster than a teenager with your gold card -- or they could be tossing lots of money into that expensive new pet project that may or may not work.

You just don't know with these figures alone. The financial picture remains incomplete.

A tale of two opposites
Take Apple and Sprint Nextel, for example. Both have lots of cash. But Apple has more than $25 billion in cash, no debt, hauled in a ridiculous $9.5 billion in free cash flow in the past 12 months, and returned an impressive 19.8% on invested capital.  

Sprint, on the other hand, has $4.2 billion in cash, carries a whopping $22.6 billion in debt, earned a modest $2.3 billion in free cash flow, but still returned negative 0.4% on invested capital. Oh, and Sprint paid $5.9 billion to its creditors over the past 12 months (including interest payments). Those are two different companies in two remarkably different places.

I'm not saying that Apple is a much better investment than Sprint (OK, well, I believe it is); I'm simply trying to illustrate why looking at cash figures can be misleading.

Just one piece of the puzzle
Instead of simply highlighting companies with huge bank vaults, ask yourself whether a given company will be adding to that stockpile in the future or taking away from it. And most important, identify just what the company intends to do with that cash.

Companies sporting generous coffers can't guarantee that their products are going to sell in the future or that their industries are sustainable for the long term.

Cash is necessary -- necessary to avoid bankruptcy in the short term and to operate properly in the medium term. In fact, we Fools like our stocks to support healthy cash cushions in the (likely) event of an emergency. But cash can only get you so far. Companies still need to have a plan -- a good plan -- for that cash.

The truth is stranger than fiction
There is another thing you should know about cash and the people who hold it. According to research confirmed by several different sources, the best managers of cash tend to be, ironically, the same companies that regularly redistribute it back to shareholders in the form of dividends.

As the master of your own money, you can probably appreciate how a dividend-paying company with limited resources must be more disciplined with its spending, because it knows it'll have to pony up a dividend to shareholders on a regular basis. Over the long run, these institutions generally become better stewards of capital.

The difference isn't marginal, either. Research has shown that from 1972 to 2006, S&P 500 dividend-paying stocks actually performed significantly better than their non-paying peers -- by a sizable margin of six percentage points per year! That outperformance can be at least partly explained by the burden (a blessing for shareholders) of having to pay a dividend regularly.

Foolish bottom line
Cash is a good thing. Most companies can sidestep total collapse with lots of the green stuff. But having cash today won't help you navigate the difficult waters of business tomorrow. And it doesn't mean that you, as a shareholder, will ever see a dime of it.

That is why the Motley Fool's Income Investor service looks not only for companies with strong balance sheets -- so they can avoid bankruptcy in the present -- but also demands that their companies develop the long-term fiscal discipline that is promoted by paying a regular dividend. The strategy works: The average recommendation is beating the market by more than five percentage points.

Want to take a free look? Click here for a 30-day trial to the market-beating service.

Nick Kapur owns no shares of any company mentioned above and wishes he had more cash. Apple and Electronic Arts are Motley Fool Stock Advisor recommendation. Sprint is an Inside Value selection. Bank of America is a former Income Investor selection. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 01, 2009, at 9:36 AM, madmilker wrote:

    does tat mean Bill Gates is drowning.....

  • Report this Comment On February 01, 2009, at 10:41 AM, wax wrote:

    I had never heard of Gerdau, S.A. (NYSE: GGB). I found out that it was a Brazilian company, which explains why I had not heard of it.

    Looking at their latest ANNUAL financials, I noticed that while the company does have a lot of cash, they don't have enough to pay off all of their debt, and given the company's anemic free cash flow of $0.13 per share, I doubt that will change any time soon.

    My point here is that cash may be king, but sometimes even the king...needs to be avoided.


  • Report this Comment On February 01, 2009, at 1:37 PM, Alex1963 wrote:

    Mr. Kapur,

    I've just finished reading "Buffetolgy" and find many of your points are along the same lines. I plan to review my entire portfolio using your (& Buffets) screening criteria to see how I really stack up.

    Great article

    Madmiker, if you're saying MS is a good investment candidate, I agree. I haven't bought it yet but I keep watching it an wondering whay I hear so few bull opinions. (Buffet doesn't own it and the book says it's because he "doesn't understand the industry" and maybe because he feels it is a "price competive company" and lacks a "durable competive edge" therefore it's to be avoided? I'm not sure I agree, I think they have a pretty darn good & defensible moat)

  • Report this Comment On February 01, 2009, at 8:52 PM, catndog wrote:

    I would not consider buying Microsoft any time soon!

    1) this company is to big

    2) their Vista program is a flop

    3) Zune is gone

    4) growth potental is very low for the forseeable future

    Look for growth, with products that are selling, and will continue to have rapid growth. Companies like RIMM, AAPL, etc.

  • Report this Comment On February 02, 2009, at 12:35 AM, catoismymotor wrote:

    You want Swimming In Cash? Try KHD.

  • Report this Comment On February 02, 2009, at 11:56 AM, cramar7 wrote:

    Your figure of cash for Apple is out of date. As of the latest 1Q results, Apple now has $28.1B in cash.

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