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

The P/E ratio often includes billions of dollars sitting idle on a company's balance sheet. Many Dow stocks look far cheaper when you remove this cash to focus only on business operations.

May 28, 2014 at 12:35PM

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.


Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Alex Planes owns shares of Intel. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends 3M, American Express, Chevron, Cisco Systems, Coca-Cola, Goldman Sachs, Home Depot, Intel, Johnson & Johnson, McDonald's, Nike, Procter & Gamble, UnitedHealth Group, Visa, and Walt Disney. The Motley Fool owns shares of General Electric Company, Intel, International Business Machines, Johnson & Johnson, JPMorgan Chase, Microsoft, Nike, Visa, and Walt Disney and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers