Got Cash?
The Dynamic Wealth Report
September 28, 2010
by Corey Williams, Editor
Americans' collective wallet got a bit lighter last quarter.
According to the Federal Reserve, household net worth dropped $1.5
trillion in the second quarter. Clearly, this is another blow to
consumers struggling to repair their balance sheets.
I’m sure you’ll agree it’s a tough environment for consumers. How are
they supposed to be optimistic when their net worth is still nearly 20%
off its 2007 peak?
But that’s just part of the story.
Individuals may be strapped for cash… But corporations are flush with
cash.
In fact, the Federal Reserve said corporate cash is at near record
levels. Right now they have an incredible $1.84 trillion in the bank. And non-financial companies in the S&P 500 have $837 billion of it…
This cash is just idling on the sidelines. And it’s been sitting there
for a while. Companies have been sitting on their horde of cash for
months, or in some cases, years.
I was hoping this cash would pump up the economy as the recovery took
hold. But it hasn’t happened. Even as the economy has strengthened,
companies have been unwilling to part with their cash.
There are plenty of reasons why they haven’t… But the two cited most
often are lack of opportunities and fear of another downturn.
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I think companies are finally going to put their cash to good use. And
it makes a strong case for buying companies with high cash balances.
I’ll tell you one company I’m bullish on in a minute…
Here’s the deal…
In the last year, 96 S&P 500 companies managed to increase earnings per
share while revenues fell. There’s only one way to pull off this feat…
cutting costs.
Clearly, stocks are benefiting from cost cutting.
Now corporate America is lean and mean. There’s no more “fat to cut”.
Companies won’t be able to boost earning by cutting costs going forward.
What I’m leading up to is this… It’s going to be hard for companies to
keep up with their recent earnings growth rates.
Unless the economy picks up steam, many companies will see earnings
growth fall short of expectations. And judging by recent economic data,
the recovery is going to be painfully slow.
But companies sitting on huge stockpiles of cash have a few other
options.
They can reward shareholders by increasing dividends, starting share
buybacks, and making acquisitions. If done properly, share buybacks and
acquisitions can be a big boost to earnings per share.
That’s why I think companies with big cash balances will outperform over
the next couple of quarters. They have the ability to deliver value to
the shareholder.
One company I like is sitting on $18 billion in cash. And they’re
already starting to spend it to boost earnings and shareholder value.
Intel (INTC) is a company that doesn’t need much of an introduction.
They’re the world’s largest semiconductor manufacturer.
They recently purchased computer and software security company McAfee
(MFE) for $7.68 billion. This deal will provide a long term boost to
their top and bottom line growth.
McAfee had over $2 billion in revenue in 2009. And it has “enjoyed
double-digit, year-over-year growth and nearly 80 percent gross margins
last year”.
The acquisition isn’t expected to immediately boost Intel’s earnings. But in the long run, their new business has much better growth prospects
than the $8 billion in cash sitting on their balance sheet.
Remember, Intel could be managing expectations with their prediction the
acquisition will be dilutive to earnings. By setting the bar low, any
boost the acquisition provides to earnings will be seen as a huge
positive.
And to top it off, they’re currently in the midst of a $25 billion stock
repurchase plan. And they already increased their dividend to $0.63
earlier this year. It’s now yielding 3.2%.
Simply stated, Intel is doing all the right things to increase
shareholder value. And they can do these things because of their cash
position.
Here’s the bottom line… Big companies will find it hard to cut costs and
boost earnings per share. Those with cash have a huge advantage. So take
a closer look at the companies sitting on mountains of cash. They’re the
best positioned to deliver shareholder value in a slow growth recovery.
It’s a busy week for the IPO market. At least six companies in the U.S.,
China, and Germany have already launched or are scheduled to IPO this
week. The success or failure of the IPOs this week could set the tone
for other deals waiting in the wings.
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