Here at StreetAuthority, we've been relentlessly talking about the $1.7 trillion "Dividend Vault
," the name we've given to the unprecedented amount of cash that U.S. companies have stockpiled since the Great Recession.
This is great news for investors, because we're predicting that a large chunk of that $1.7 trillion will go toward dividends and stock buybacks. Of course, much of this $1.7 trillion in cash is held by companies with a similar amount of debt as well.
That's why it's so important to drill down and seek out the cash-rich companies that carry little or no debt, as these are the most likely candidates to sharply boost dividends or stock buybacks.
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One of the ways to find these "Kings of Cash" is to run various investment screens. One of my favorites involves a look at companies with a huge amount of net cash (cash minus debt) as a fairly high percentage of market value. Investors quickly start to think about technology giants like Intel (Nasdaq: INTC), Cisco Systems (Nasdaq: CSCO) and Microsoft (Nasdaq: MSFT) when it comes to stocks with these criteria. We've talked about these types of companies quite frequently in recent months as we've discussed the "Dividend Vault." And I'll be taking a closer look at them in a moment.
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But first, let's take a look at companies with absurdly high levels of cash in relation to their market value. Across the 1,500 companies that comprise the S&P 400, 500 and 600, there are 12 companies that have more than 50% of their stock market value reflected in their net cash position.
These stunningly large cash balances invite a clear question: Why aren't these companies aggressively hiking dividends or buying back shares? Their money is just sitting there, earning nothing. Whether they choose dividends or buybacks depends on how their shares are valued in relation to tangible book value. As I've written before, buying back stock when shares trade below book are a no-brainer. Which of the companies on the above table are trading below tangible book?
Only Pericom Semiconductor (Nasdaq: PSEM) and Electro Scientific (Nasdaq: ESIO) sport a price-to-tangible-book ratio below 1, though Sigma Designs (Nasdaq: SIGM) and Oplink Communications (Nasdaq: OPLK) trade just above 1, and look like great stock buyback candidates, too. Other companies on this list may be wiser to place an emphasis on dividends rather than buybacks.
As has been the case for a number of years, the tech sector is the place to find stunning cash balances. Many of these companies piled up billions of dollars of extra cash for a rainy day that never arrived. Although some companies such as Cisco and Intel have begun to part with that cash, others like Apple (Nasdaq: AAPL) are still stuck with their heads in the sand.
Time to Spread the Wealth
In years past, companies would earmark a small portion of their cash flow for dividends with the remainder going to share buybacks, acquisitions or internal investments. Indeed, payout ratios for most companies in the S&P 500 are in the 25% to 40% range.
Yet these tech companies have so much money on hand, that they can handily afford to part with 100% of their cash flow towards buybacks and dividends. As I wrote a few weeks ago, a move by Apple to return more cash to shareholders is precisely what this flagging stock needs.
Aggressive moves on this front need not imperil a company's fiscal health. During the past eight years, Cisco Systems has bought back 1.6 billion shares, shrinking the share count by more than 20%, yet Cisco still has more than $30 billion in net cash lying around. In fact, Cisco's net cash balance has risen from $8 billion to $33 billion since 2004, so you could argue that Cisco should have been even more aggressive with its share buybacks. The huge cash pile is one of the reasons why Cisco is my top tech pick for 2013.
Risks to Consider: As with any buyback programs, a plunge in the stock market later on would diminish the value of any buybacks that were done at far higher prices. Also, companies like to boost dividends in a steady and predictable fashion, so it's unlikely that any of the companies in this column will double or triple their payouts in the near term.
Action to Take --> We're entering a new era of investing. Cash-rich companies are likely to keep ramping up their buyback and dividend plans. Even if these companies left their $1.7 trillion "Dividend Vault" intact and simply returned all excess cash flow to shareholders, then the wave of dividend hikes and share buybacks will grow into a tsunami.
-- David Sterman
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of CSCO, INTC in one or more of its "real money" portfolios.