If the recent volatility and selling in the broad market have taught investors anything, it's that cash is still king right now. But holding cash in your portfolio is only part of the equation; cash in corporate coffers is the other part.
Corporate profits are now at an all-time high, and so are corporate holdings of cash. By and large, companies have been sitting on their cash, opting to hold on to significant balance-sheet liquidity rather than put it to work on acquisitions or dividend payouts.
That could be about to change.
August's selling has spurred an increase in merger-and-acquisition activity as companies scope out bargains among potential acquisition candidates. In a sense, major corporations have the potential to be the ultimate value investors; when stock valuations are discounted to fundamentals, they can unlock value almost instantly by buying out a cheap company and bringing its assets and profit stream onto their own. In short, this is a perfect environment for cash-rich companies to add substantial shareholder value.
At the same time, investors are starting to demand more dividend income from their equity holdings. That sentiment swing could spur more payouts from companies who aren't doing anything with their hefty cash reserves.
To take advantage of the opportunities presenting themselves in cash-rich stocks, here's a look at six names that currently hold significant net cash positions in this market.
Apple
I can't even start to discuss cash-rich companies without bringing up Apple (AAPL, news). Back in July, with debt-ceiling debates raging on Capitol Hill, Apple actually held more cash in its accounts than the U.S. Treasury -- a $76.2 billion position in cash and available-for-sale securities (that number includes long-term marketable investments). Essentially, that means that $82 of Apple's share price (recently around $400) is made up of its cash position.
That also means that, taking out the value of Apple's cash, the company's trailing 12 months price-earnings ratio is currently 11.88. So, best-in-breed tech stock Apple is currently trading for an earnings multiple 56% lower than the average tech-sector stock. Granted, there's reason to be anxious about a large position in Apple -- visionary CEO Steve Jobs just stepped down from the corporate helm, and the stock's 46% rally in the past 12 months is understandably scary for investors who are worried about overpaying. But on an absolute-valuation basis, Apple's still cheap.
Apple doesn't pay dividends. And its acquisitions have historically been smaller companies that are accretive, not transformational to the company's core business. Some analysts are suggesting that Apple could start issuing a dividend, and while I think that a buyback is a likelier way for new CEO Tim Cook to return value to shareholders, it's certainly not impossible for Apple to start shoveling out checks.
Frankly, this stock's balance sheet makes it look like a good deal regardless of how it handles its cash position.
Apple shows up on recent lists of 30 top-rated fast-growth stocks and 10 stocks that may outperform through 2011.
General Motors
Believe it or not, General Motors (GM, news) is also sitting on an ample cash position. While it seems shocking that the same company that crawled to Washington for bailout cash in 2008 could have excess cash reserves, the company's bankruptcy left it on solid financial footing, with $36.5 billion in cash and securities and just $5 billion in debt.
That doesn't mean that GM is living the high life. That automotive debt number doesn't include a $9 billion pension shortfall, but that concern may be academic. GM has been carving away at its pension obligation, which weighed in at $17 billion as recently as 2009. The company's re-emergence into profitability should help to minimize that number in the next couple of years.
Meanwhile, GM is working to offer attractive products to consumers. Sales are starting to grow, and coupled with much-improved costs, the company is now capable of generating considerable cash flow. Ultimately, GM's cash position could factor into its ability to speed the U.S. government's exit from its ownership position in shares -- it means that the capital markets are going to be much more receptive to an influx of new shares.
While GM isn't yet at full speed, this isn't the same stock pre-crisis investors got hammered on.
Dell
Dell (DELL, news) is another tech name that's sporting a cash-flush balance sheet right now. As of its most recent quarter, the company is holding $15 billion in cash and short-term investments, plus an additional $1 billion in longer-term securities -- a $16 billion position that more than offsets a $6.4 billion debt load. That puts the company's cash-adjusted P/E at a mere 4.64.
That may be an incredibly low price multiple, but investor should be aware that the muted P/E is somewhat justified. Dell's core business is still computers and computer products, a business that's significantly commoditized these days. Dell's margins are paper-thin, and its competitive advantage is limited. To counter that, management has been pushing toward building its enterprise IT business, a crowded space that's been getting attention from every other major PC maker.
All of that said, while limited growth potential does temper the stock's P/E, Dell's really cheap right now.
Management has been deploying some of that cash lately, adding shareholder value with a recently announced $5 billion share-buyback program. In total, the buyback covers nearly 20% of Dell's current market value. If the company is aggressive while shares remain cheap, it would dramatically benefit shareholders.
Dell is one of TheStreet Ratings' top-rated computer hardware stocks.
The tech sector's penchant for hefty cash balances continues with Google (GOOG, news). The search giant has been known for its aptitude for acquisitions, most recently with its August decision to buy Motorola Mobility (MMI, news)for $40 per share in cash. Even though stock valuations were hammered in the summer, Google hasn't been bargain hunting -- the acquisition represented a 63% premium to MMI's previous closing price.
But the company has the wherewithal to handle the big price tag. Google's sitting on roughly $40 billion in cash and available-for-sale securities, a serious net cash position, given the company's mere $3 billion in long-term debt. Obviously, the MMI acquisition changes those numbers appreciably.
Google is still the league leader in paid search, a business that's particularly compelling given the ability of online advertisers to attribute ad spending to specific transactions. Because of the high level of transparency from ad click to online purchase, companies are willing to spend big on Google's products, provided that the payoff continues to make economic sense. That's a major economic tail wind that investors will want to be part of as long as Internet penetration continues to increase worldwide.
Google's shareholders will need to make sure that the company doesn't deviate too far from its core business until it can justify side projects with meaningful returns on investment.
Qualcomm
Qualcomm (QCOM, news)is a debt-free communications stock that has a $5.26 billion cash position and an additional $14.5 billion in available-for-sale securities.
That cash comes from a strong mobile-device industry that essentially pays Qualcomm a licensing fee for nearly every 3G and 4G phone now on the market. Because the company's robust intellectual property portfolio is mission critical for tech companies that want to put out the next hot smartphone, it benefits as the industry as a whole grows. Qualcomm's biggest business is still in providing chips that help those devices work. While considerable competition does pose some serious challenges over the next few years, the company's licensing revenues at least offer some semblance of a fundamental backstop.
A history of dividend increases means that this firm is well suited to paying some of that cash back to shareholders right now.
Qualcomm, shows up on a list of stocks with the most hedge fund action in the most recently reported quarter.
Accenture
Consulting giant Accenture (ACN, news)is deeply entrenched in providing its expertise to big business. The company counts 96 of the world's 100 biggest companies among its clients, and it has a geographic footprint that spans 50 countries.
Service-based businesses are typically capable of generating impressive cash flows, and Accenture is no exception. The company's nearly 10% net margins have left it with a $5.3 billion cash position and no debt.
Accenture does a good job of reminding clients about why they should keep its consultants around. The company's long-term relationships are built on its ability to justify its presence through increased efficiency or revenue-generation ideas -- and its strong pipeline is a testament to that fact, particularly in recent years when companies have been trimming discretionary spending en masse.
Accenture has a consistent track record of returning value to shareholders in the form of buybacks and dividend hikes.
Jonas Elmerraji, based in Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets.
Umm, what about Intel and Microsoft? Get rid of Dell and Government Motors. GM has tons of debt including billions in unfunded pensions.
