It takes a buck to make a buck. That's true for individual
investors and the corporate giants in the S&P 500 alike.
Through the history ofcapitalism andinvesting , capital is the
lifeblood that makes growth possible.
That's the reason I ambullish on the biggestcash generators in
the S&P 500. In response to the 2008 financial implosion and
ongoing economic uncertainty, the S&P 500 has accumulated
record cash in the past four years.
Third-quarterearnings highlighted the cash-hoarding trend, where
many companies continued to save instead of investing in growth,
according to JP Morgan. This pushed cash balances up 14% from last
year and on track to hit $1.5 trillion, both record levels.
But even though that big financial cushion is making the private
sector feel more comfortable, companieswill eventually loosen the
purse strings and begin to spend. This is just a matter of pure
growth. This growth could be organically or throughacquisition ,
but capital spending on new products and markets is a great way to
And when companies start to invest in growth, then savvy
investors will benefit.
Besides product andmarket acquisitions, companies withlots of
cash can also buy backshares . This has been a very popular move
this year, with many cash-rich companies announcing additional
buybacks to reward investors.
A big cash balance can also trigger aspecial dividend .
Whole Foods (
Costco Wholesale Corp. (Nasdaq: COST)
, for example, announced special dividends in the past month to
incentivize shareholders and juice its share price.
Though hoarding cash seems to be popular these days, looking
forward, cash-heavy companies are going to be sitting pretty when
it's time to be aggressive again.
These 10 companies (excluding financials) had the highest cash
balances at the end of the third-quarter, but only three stand
out as my favorite stocks toprofit from when these companies
start spending again.
Microsoft (Nasdaq: MSFT)
Market cap : $230 billion
Cash on hand: $67 billion
Microsoft has been trapped in the ultimate range trade
for the past 12 years, spending 90% of its time
oscillating between $25 and $30. But that's actually
normal for ablue chip with a heavy $230 billion market
cap. But this stagnant share price belies the company's
still very dominant position in many markets. Make no
mistake, Microsoft still earns plenty ofmoney .
Shares trade at only 10 times projected earnings of
$2.88 per share for 2012, a sharp discount to the 10-year
average of 17 times earnings. And don't forget, Microsoft
has turned itself into a soliddividend payer with a very
solidyield of 3.4%. That's how the company is giving
money back to shareholders. Microsoft will never be the
highflier it once was, but it has settle into a stable
stock that pays a nice dividend. The fact that it appears
undervalue now is just the cherry on top.
Market cap: $168 billion
Cash on hand: $23 billion
This is another highflier from the 1990s, one of
the top performers of the heady decade. But unlike
Microsoft, shares have begun recovering 47% in the past
two years and hit a new five-year high in October. Pfizer
is benefiting from growing demand for health care
products and services with an industry-leading portfolio
of generic and branded drugs. With a $186 billion market
cap, this is no small company. But its low valuation
suggests more upside, trading at just 10 times projected
2012 earnings of $2.16 per share, a solid discount to the
industry average of 14 times. And when you add in a 3.5%
dividend, this is amega cap with tons of cash to support
future dividend growth.
Chevron Corp. (
Market cap: $215 billion
Cash on hand: $22 billion
Chevron is one of the largest energy companies in the
world withmultiple businesses and a market cap of $215
billion. Unlike smaller energy companies, Chevron has
traded strongly in the past two years, with shares up
24%, handily beating the S&P 500's 15% return in the
same period. Chevron is an earnings and cash-flow
machine, pushing its cash andmarketable securities
balance to $22 billion. With full-year earnings for 2012
expected to come in at $12.13 per share, this is another
mega cap with value. Chevron'sdividend yield is another
reward for investors looking for more stability.
Risks to Consider:
Too much cash on thebalance sheet can be a drag if companies
underinvest in growth. Although cash hoarding in the past two
years has lifted cash balances to record highs, this trend has
been driven by economic uncertainty and fear of bad times
Action to Take -->
These 10 stocks have the biggest cash balances in the S&P
500, providing them with additional stability for economic
uncertainty. But longer term, those big cash balances present an
opportunity for investors tocapitalize on future growth, dividend
increase and special dividends.