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These 3 Dow Stocks' Huge Cash Hoards Make Them Much Cheaper Than You Think

Everyone wants to find a great stock that is trading at a bargain price. Some investors spend hours poring through data on hundreds of companies to find one standout stock to anchor a portfolio. But it might be far easier than you think to find your next great investment, especially if you start with the 30 stocks that make up the Dow Jones Industrial Average (DJINDICES: ^DJI  ) .

These companies generally exemplify the qualities we look for in great long-term investments: they're established market leaders with sustainable dividends and have put together decades of strong growth in all sorts of economic environments. Those qualities of size, strength, and stability also make many of these companies phenomenal at generating cash: 13 of the Dow's 30 components control nearly $700 billion in cash abroad, in addition to the billions they've got stashed right here at home. Cash comes in handy when a large-cap company is looking to buy its way to more business, but it can also make fairly valuing that company a little trickier; for Dow components General Electric (NYSE: GE  ) , Cisco (NASDAQ: CSCO  ) , and Microsoft (NASDAQ: MSFT  )  it can alter valuations so significantly that we're practically talking about a different company.

What does this mean?

When we talk about valuations, we're usually talking about the price-to-earnings ratio, or P/E. This is usually calculated by dividing a company's share price by its earnings per share. But this valuation encompasses all parts of a company -- the moving parts that are making (or losing) money, and the money itself, which is usually sitting somewhere waiting to be used.

Subtracting a company's cash per share from its P/E illustrates how valuable the market thinks that company's business is on its own, without the impact of those idle billions of dollars. General Electric, Cisco, and Microsoft are three America's largest corporate holders of cash abroad, but it's their size relative to the easily deployed part of their cash hoards that gives them the largest discount out of all 30 Dow stocks.

Let's look at what makes these three companies the stocks with the biggest "cash discount" of the Dow's components. At the end of this article, you'll find a table with the complete ranking of the 30 blue-chip stocks, from the largest to the smallest discount. Keep in mind that several Dow stocks operate in the cash-dependent financial industry, which is why they've been excluded from our official ranking here. 

Third-largest "cash discount" on the Dow: Microsoft
Bill Gates' baby has been a legendary cash machine for decades, as net margins have rarely dipped below 20% since its IPO nearly three decades ago. Microsoft has made a few splashy acquisitions over the years, but even its all-time high buyout price -- $8.5 billion for Skype in 2011 -- hasn't done much to dent the company's mountain of money. Microsoft is so good at making money that its cash discount has doubled from a relatively modest 13% at the start of 2010 to 26% today:

MSFT Cash and Short Term Investments (Quarterly) Chart

MSFT Cash and Short Term Investments (Quarterly) data by YCharts.

Second-largest "cash discount" on the Dow: Cisco
Cisco hasn't been quite as good as Microsoft at making money, as its available cash has only grown by 44% over the past five years, while Microsoft's hoard is nearly three times larger now than it was in late 2009. However, the market has evidently taken a dimmer view toward Cisco's business operations than it has toward Microsoft's, as the networking kingpin for several years has sported one of the largest discrepancies between baseline P/E and cash-less P/E of any Dow stock:

CSCO Cash and Short Term Investments (Quarterly) Chart

CSCO Cash and Short Term Investments (Quarterly) data by YCharts.

Today Cisco is tied for the second-cheapest nonfinancial Dow stock when cash is taken out of the equation, which is rather remarkable for a company that has more than doubled its earnings per share over the past decade.

The largest "cash discount" on the Dow: General Electric
GE has so much money in its coffers right now -- over $132 billion, at last count -- that it could buy 14 of its fellow Dow components outright. Not only is GE by far the largest holder of foreign cash of any U.S. company, it's also one of America's largest financial companies -- its GE Capital arm boasts over $500 billion in total assets thanks to hundreds of billions of dollars in loans made to businesses and consumers around the world. That gives GE an unparalleled position among its Dow peers, as its industrial operations are supported by so much cash from its financing segment that the company as a whole trades at a 50% lower valuation without that cash:

GE Cash and Short Term Investments (Quarterly) Chart

GE Cash and Short Term Investments (Quarterly) data by YCharts.

General Electric has been trying to slim down its financing arm since the Great Recession, but its cash on hand hasn't been hurt in the process, since GE now holds over $30 billion more in easily deployable resources than it did coming out of the crash. Investors who focus on GE's headline P/E figure are missing the bigger picture by a mile -- the company has never had such a large gap between its inclusive P/E and its cash-free P/E ratios, and this latter ratio hasn't been so consistently low in decades.


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Read/Post Comments (6) | Recommend This Article (4)

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 May 28, 2014, at 1:31 PM, pondee619 wrote:

    "-- the company (GE) has never had such a large gap between its inclusive P/E and its cash-free P/E ratios, and this latter ratio (its cash-free P/E ratio) hasn't been so consistently low in decades."


    What GE chart are you looking at? Looks to me that the gap between the red and orange lines has been consistently 10-11 throughout. It also looks like the red line (PE less cash) is at, or near a high for the chart period. It was briefly higher Dec '13 to Jan '14. Perhaps you put up the wrong time frame chart to show your point?

  • Report this Comment On May 28, 2014, at 1:52 PM, TMFBiggles wrote:

    @ pondee619 --

    I used a five-year frame for these charts, but I looked back as far as the 1980s for GE on the valuation metrics. On that scale, the post-crash gap is unprecedentedly large (although it has been roughly the same size for the last few years, as you've pointed out), and the ex-cash P/E -- while at a post-crash high -- is still lower than it's been since the mid-80s. If you only look at the post-crash period, GE's valuation is at a high point, but when we look back earlier, the ex-cash P/E has only ever been as low as it is today following the dot-com crash, and before that in the mid-80s.

    Let's see if this image link works to illustrate what I'm talking about:

    - Alex

  • Report this Comment On May 28, 2014, at 1:53 PM, EquityBull wrote:

    Absolutely dreadful article and misleading. How can you talk about CASH without talking about the DEBT also?

    GE has (according to yahoo finance) 380 BILLION in total debt. Now that discount turns into the exact opposite and the PE skyrockets.

    Remember when you look at a company's assets you need to look at cash AND debt.

    You need to rewrite this and include the debt taken on by GE, MSFT and Cisco. Cisco boasts 21 billion in debt. Microsoft has 23.5 billion in debt.

    These 3 don't look so discounted now...

  • Report this Comment On May 28, 2014, at 2:19 PM, EquityBull wrote:

    You need to include debt in your analysis for it to be prudent. Once you do you can see the PE skyrockets for GE. These companies all carry sizable debt on their balance sheet. There is no PE discount on GE after debt is taken into account and the Microsoft and Cisco discount plummets.

  • Report this Comment On May 28, 2014, at 2:49 PM, crca99 wrote:

    I have missed something in the arithmetic or logic. Are you saying P/E of 15 minus ttm cash/share 3 equals new value of 12? Or should the cash be removed before earnings are calculated? Thx.

  • Report this Comment On May 28, 2014, at 3:39 PM, TMFBiggles wrote:

    @ crca99 --

    P/E less cash divides the company's share price by earnings -after- the share price has first been adjusted downwards by subtracting out cash per share.

    Here's a good explainer on the metric using Apple as a guideline -- the P/E less cash was a popular tool Apple bulls used to argue for a higher valuation for several years, though you don't hear them talk about it so much:

    - Alex

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Alex Planes

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.

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9/3/2015 11:07 AM
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