4 Cash-Rich Companies That Should Prosper in a Poor Market

A recent survey of economists puts the odds of a U.S. recession within the next 12 months at 1-in-3. Historically, a recession causes less credit lending and declining profitability for companies, which often lead to layoffs that further depress the economy. But this time is different -- at least for cash-rich companies.  

Companies traditionally use cash to invest in growth, pay dividends, or buy back stock. But that all changed when large corporations began socking away cash to safeguard against an uncertain economic future. Companies with heavy amounts of cash on their balance sheets are better suited to sustain capital spending no matter what happens to the economy.

Tech companies are among those with the most cash and short-term investments on the books, with Apple (Nasdaq: AAPL  ) , Google (Nasdaq: GOOG  ) , and Microsoft (Nasdaq: MSFT  ) combining for about $119 billion. Microsoft weighs in with $51.4 billion, followed by Google with $39.1 billion and Apple with $28.4 billion. Cash in hand is the most liquid asset a company can hold.

Google's $39 billion in reserves could help the search giant avoid layoffs should the economy take another turn for the worse. Google's in a far better place than it was during the recessionary drop of 2008 and 2009, when it laid off hundreds of employees and reduced its capital spending to $263 million in the first quarter of 2009 -- down from $842 million in the year-earlier quarter.

This time around, Google seems immune to broader market volatility. In fact, this year Google pledged to increase its tech-savvy workforce by almost 25% -- which would put the company's headcount at about 30,000. Even more shocking to investors was Google's decision to give all of its current employees a 10% raise in salary for 2011 -- an apparent bid to keep its talent.

Technology changes at the speed of light, which explains why tech companies are in a constant battle to recruit and retain talent. Powered by a fat stack of cash, Microsoft took after Google, giving raises and more stock upfront to employees earlier this year.

Microsoft generates more than $1 billion in cash flow each month. If the economic outlook remains cloudy, the extra cash could help the software giant make strategic acquisitions, helping it better contend with competitors like Google and Cisco Systems (Nasdaq: CSCO  ) .

Cisco is another tech player that can retain cash flow in a down market. The computer-networking firm currently holds $44.6 billion in cash and short-term investments. Cisco spends a modest $5 billion to $6 billion annually in research and development, which is critical to the ever-changing tech industry. The company also uses its cash to make smart acquisitions, particularly those with the potential to reach billion-dollar markets.

But many of these cash-rich companies offer shareholders little or no dividends. Remarkably, Apple's seen record profits pour in without issuing a cent of debt. It reported twice as much revenue in its most recent quarter as it did for the entire fiscal year in 2005. Still, the tech titan has never paid a dividend, despite having enough money to pay a one-time dividend of roughly $81 a share if you include cash as well as short-term and long-term investments.

Instead of paying dividends, Apple uses its cash to create an edge over the competition -- like the company's advance payment in 2009 of $500 million to Toshiba on future flash chips that power iPhones and iPods. This helped Apple avoid potential chip shortages or price swings resulting from poor economic conditions.

Whether or not you agree with the way public companies are managing their cash flow, this is certain: These profit-building tech stocks will succeed regardless of the economy's direction. Learn where the tech industry is headed, and which two companies will reap the profits in this free video report: The Two Words Bill Gates Doesn't Want You to Hear. To get the video now, while it's still free, simply click here.

Fool contributor Tamara Rutter owns shares of Apple. Connect with her on Twitter @TamaraRutter. The Motley Fool owns shares of Apple, Google, Cisco, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Cisco, Google, and Microsoft, as well as creating a bull call spread positions on Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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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 October 11, 2011, at 11:57 AM, chanman67 wrote:

    Not true except for Google, since the rest have most of their money abroad and will face heavy taxes if they bring it back to the US. So, they will layoff employees in the US but hire more abroad, using their stashes in foreign countries.

  • Report this Comment On October 11, 2011, at 12:41 PM, SkippyJohnJones wrote:

    @Chandru7 - money could also be applied to foreign acquisitions. Microsoft recently bought Skype, overpaying largely because it was still cheaper than repatriating the $$.

  • Report this Comment On October 11, 2011, at 2:39 PM, BradReeseCom wrote:

    Hi Tamara,

    A U.S. Senate investigative report refutes the job creation claims made by Cisco CEO John Chambers:

    http://www.bradreese.com/blog/10-11-2011.htm

    Sincerely,

    Brad Reese

  • Report this Comment On October 12, 2011, at 11:19 AM, cycorp89 wrote:

    I could be wrong, but I figured AAPL's cash hoard was closer to USD75B (and climbing)

    On a macroeconomic level, the worry certainly is there that companies are 'socking away' as much cash as possible because they look to the future and a possible recession is highly probable...

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