Here at StreetAuthority, we've been relentlessly talking about
the $1.7 trillion "Dividend Vault," the name we've given to the
unprecedented amount ofcash that U.S. companies have stockpiled
since the GreatRecession .
This is great news for investors, because we're predicting that a
large chunk of that $1.7 trillionwill go toward dividends andstock
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
One of the ways to find these "Kings of Cash" is to run
variousinvestment 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 ofmarket value . Investors quickly start to
think about technology giants like
Cisco Systems (Nasdaq:
when it comes tostocks with these criteria.
We've talked about
these types of companies quite frequently in recent months as we've
discussed the "
" And I'll be taking a closer look at them in a moment.
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
backshares ? Theirmoney is just sitting there, earning nothing.
Whether they choose dividends or buybacks depends on how their
shares are valued in relation to tangiblebook value . As I've
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?
Pericom Semiconductor (Nasdaq:
Electro Scientific (Nasdaq:
sport a price-to-tangible-book ratio below 1, though
Sigma Designs (Nasdaq:
Oplink Communications (Nasdaq:
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
are still stuck with their heads in the sand.
Time to Spread the Wealth
In years past, companies would earmark a small portion of
theircash flow for dividends with the remainder going to share
buybacks, acquisitions or internalinvestments . Indeed, payout
ratios for most companies in the S&P 500 are in the 25% to 40%
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
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 stockmarket 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
Action to Take -->
We're entering a new era ofinvesting . Cash-rich companies are
likely to keep ramping up their buyback and dividend plans. Even if
these companies left their $1.7 trillion "
" intact and simply returned all excess cash flow to shareholders,
then thewave of dividend hikes and share buybacks will grow into a
-- David Sterman
P.S. -- Corporate America is sitting on a $1.7 trillion
"Dividend Vault" -- and it just might save your retirement. To
learn more, click here.
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 if its "real money"
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