Corporate Cash Kings
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Cash may not be piling up in your investment account, but it sure is heaping higher on the balance sheets of companies throughout the U.S.
According to an analysis at Rochdale Research of year-end data that just became available, nonfinancial companies in the
S&P 500
ended 2004 holding a whopping 14% of their asset bases in cash and cash equivalents.
That is a new record, according to Rochdale analysts, who have studied historical data on the matter going back decades. As you might guess, the most recent uptrend in stockpiling cash began soon after the terrorist attacks of September 2001, as companies decided they needed to insulate themselves against the potential for further such events.
One might have expected the effort to abate as memories faded and earnings grew, but that has not been the case as recent
SEC
filings suggest that companies are continuing to put money away for a rainy day. Rochdale, a boutique broker-dealer based in New York, points out that companies' apparent fearfulness stands in stark contrast to individual investors' own sentiment, which appears to be positive as shown in pervasive bullishness (until very recently) and increasingly lower CBOE Volatility Index readings.
This should be good news, of course, because companies with a lot of cash can do share buybacks, throw off dividends, invest in their own businesses as merited and buy other companies.
Yet Rochdale points out a more sinister side as well. That's the plain fact that the cash pile means that companies aren't investing in inventory, plant, equipment or other businesses, and are "signaling something about their perceived prospects for future growth."
In other words, the bearish view holds that if companies liked the looks of the future, they'd be expanding factory assembly lines and buying new capacity -- but they're not. Indeed, Rochdale points out that you could almost say that it may foretell future price/earnings multiple compression as the companies may be signaling that there's no point to paying up for future growth.
So which companies are the kings of cash? As you might expect, they are successful, high-quality outfits that make money. Whether in the end they will have been proven to be conservative with their prospects is unknown, but as long as we're giving them credit for being good, we might as well also give them credit for being smart.
And as Rochdale points out, if conditions do improve, these are the kinds of companies that have options. They can invest and buy stuff at will without having to worry about interest rates.
According to the research firm's analysis, the top holders of cash as a percentage of their market value are
Louisiana Pacific
(LPX) - Get Report
, at 18%;
American Power Conversion
(APCC)
, at 17.5%;
Applera
(ABI)
, at 16%;
Hasbro
(HAS) - Get Report
, at 12.3%;
Best Buy
(BBY) - Get Report
, at 11.5%;
Gap
(GPS) - Get Report
, at 11.3%; and
J.C. Penney
(JCP) - Get Report
, at 11.25%.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment research service, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. He also writes a weekly column for CNBC on MSN Money. While Markman cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
jon.markman@thestreet.com.
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