Bank of America's 17 High-Quality Cash-Rich Stocks for Investors to Consider

Looking for a cheat sheet of the best S&P 500 stocks based on a variety of criteria? Bank of America/Merrill Lynch, the investment banking arm of Bank of America, generated 20 stock screens for investors to peruse.

"Our themes include large caps over small caps, high quality over low quality, liquidity over leverage and sustainable/growing dividends over high dividend yield," the analysts wrote in an April 29 note to clients.

BofA/Merrill Lynch found 17 high-quality, cash-rich stocks in the S&P 500, excluding the financial sector, based on the following criteria: 

  • Market cap greater than $10 billion
  • S&P quality rank of B+ or better
  • Net debt (cash) to market cap less than the index median of 16%
  • Total cash to market cap greater than the index median of 5%
  • S&P long-term credit Rating that is investment-grade
  • Stocks that are under-owned by active fund managers (relative weight less than 1 according to recent fund holdings)

The metrics are as of March 31.

BofA/Merrill Lynch cautions though that the screens are not recommended lists either individually or as group of stocks and that investors should consider the fundamentals of each company as well as their own individual investment objectives before making any investment decision. On that note, two of the 17 stocks are rated underperform by BofA/Merrill Lynch equity analysts.

With that said, here is the list of 17 high-quality, cash-rich stocks.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apple

Apple's (AAPL) total cash to market cap is 6.1%, and its net debt (cash) to market cap is 3%, according to the BofA/Merrill Lynch report. The iPhone maker's S&P quality rank is B+, and its S&P long-term credit rating is AA+. Its relative weight in large-cap fund holdings is 0.6, the report said.

Due to weak iPhone sales in the March-ending quarter, Apple reported revenue of $50.6 billion, down 13% from last year's quarter -- its first quarterly revenue decline in 13 years. The Cupertino, Calif.-based company also said that third-quarter sales would tumble further, issuing revenue guidance between $41 billion and $43 billion for the June quarter, below what analysts were expecting.

Separately, activist investor Carl Icahn announced Thursday that he had sold all of his position in Apple and blamed China woes as the reason.

BofA/Merrill Lynch analyst Wamsi Mohan rates the company at buy, with a $120 price objective.

"We maintain our rating given the switch rate from Android remains high, Apple's large cash balance, and easier iPhone compares after F3Q," Mohan wrote in an April 27 research note.

Apple is a holding in Jim Cramer's Action Alerts PLUS portfolio. Cramer and Research Director Jack Mohr wrote in a recent weekly roundup:

"We remain confident in Apple and continue to view it as a long-term investment. Its robust capital return program (which was increased along with the release of this quarter's results), growing corporate iPhone demand, high switch rates from Android and a burgeoning services business (which is unappreciated by the market) all paint a brighter picture moving forward.

"Bottom line, we believe Apple has an abundance of additional growth drivers that can propel earnings long term. Unfortunately, the long term is irrelevant for the time being, as the focus exclusively rests on whether or not it'll hit its next-quarter targets/sell-side forecasts. For this reason, and in light of near-term sales and earnings weakness, we lowered our 12-month price target to $130 from $140, which reflects 12x our reduced 2017 EPS estimates ex-cash."

PepsiCo

PepsiCo's (PEP) total cash to market cap was 7.9%, and its net debt (cash) to market cap was 15% as of March 31, according to the BofA/Merrill Lynch report. The beverage company's S&P quality rank is A, and its S&P long-term credit rating is also A. Its relative weight in large-cap fund holdings is 0.78, the report said.

BofA/Merrill Lynch equity analyst Bryan Spillane has a buy rating and a price objective of $112 on the stock.

"In our view, PEP is successfully balancing the need to reduce costs via productivity programs and re-investing a portion of the savings to sustain solid sales growth," Spillane wrote on April 18 following the drink maker's solid first-quarter earnings results. "Our price objective of $112 is based on a target multiple of 21.9x our 2017E EPS of $5.12, which represents a premium to DPS but a moderate discount to KO. In our view, this valuation is reasonable, given the company's exposure to high-value categories (soft drinks/snacks) and attractive growth opportunities outside of the U.S."

PepsiCo is a holding in Jim Cramer's Action Alerts PLUS portfolio. Cramer and Research Director Jack Mohr said recently:

"In our view, Pepsi is a strong income name, and we expect its 2.7%+ yield to grow. Beyond this, we appreciate its diversified presence, ability to adapt to a low-growth environment for consumer packaged-food companies, best-in-class cost efficiency & productivity, and robust free cash flow growth. We would be buyers on any sharp pullback and reiterate our $110 long-term price target."

Gilead Sciences

Gilead Sciences' (GILD) total cash to market cap was 10.5% and net debt (cash) to market cap was 5% as of March 31, according to the BofA/Merrill Lynch report. The biopharmaceutical company's S&P quality rank is B+ and S&P long-term credit rating is A. Its relative weight in large-cap fund holdings is 0.98, the report said.

BofA/Merrill Lynch equity analyst Ying Huang has a neutral rating and a price objective of $105 on the stock, which Huang raised in a recent note to clients by $1.

"Our price objective of $105 is based on an 8.5x multiple on our estimate of 2016 non-GAAP EPS. We believe GILD should trade at a significant discount to its large-cap peers given concerns on the long-term sustainability of its HIV and HCV franchises and lack of late-stage pipeline assets," the April 29 note to clients said.

Pfizer

Pfizer's (PFE) total cash to market cap was 12.6% and net debt (cash) to market cap was 10% as of March 31, according to the BofA/Merrill Lynch report. The pharmaceutical company's S&P quality rank is B+ and S&P long-term credit rating is also AA. Its relative weight in large-cap fund holdings is 0.83, the report said.

Pfizer reported a 32% increase in adjusted earnings per share to 67 cents from the year-ago period, beating estimates of 55 cents. The drug maker generated revenue of $13 billion, up 20% from a year ago. Analysts had forecast $12 billion.

Pfizer's results came nearly a month after the company announced it was scrapping its $160 billion merger with Allergan (AGN) after a new clampdown on so-called inversions by the Treasury Department.

Allergan is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AGN? Learn more now.

BofA/Merrill Lynch equity analyst Collin Bristow has a buy rating and a price objective of $39 on the stock.

"Our PO implies PFE can trade at roughly 17x our 2016E EPS of $2.32. We believe that continued strong cash flow generation, focus on shareholder return through a stable and growing dividend and significant share buybacks, expense control, and potential for positive pipeline news could improve sentiment over time," Bristow wrote in an April 6 note to clients.

Intel

Intel's (INTC) total cash to market cap was 16% and net debt (cash) to market cap was 1% as of March 31, according to the BofA/Merrill Lynch report. The chip maker's S&P quality rank is B+ and S&P long-term credit rating is A+. Its relative weight in large-cap fund holdings is 0.62, the report said.

Intel is laying off 12,000 workers, or 11% of its global workforce, by mid-2017 as the company pivots from a provider of chips for PCs to a greater focus on faster-growing cloud and data center businesses, as well as the "Internet of Things" and memory and programmable solutions, according to Business Insider.

Intel expects the program to deliver $750 million in savings this year and have an annual run rate savings of $1.4 billion by mid-2017, it said in an April 20 release.

"Our results over the last year demonstrate a strategy that is working and a solid foundation for growth," CEO Brian Krzanich said in the release. "I am confident that we'll emerge as a more productive company with broader reach and sharper execution."

BofA/Merrill Lynch equity analyst Vivek Arya has a buy rating and a price objective of $36 on the stock.

"We see Intel in the midst of a slow but steady transformation, as declining PC market is offset by strong growth in data center, memory, IoT and programmable ships that are growing at a double-digit pace, and account for 40% of pf sales and 60% of operating profits," Arya wrote in a May 1 note to clients. "The result of this journey is a 3-4% topline growth and 7-8% EPS growth trajectory towards $3/sh EPS by 2018e. INTC pays an attractive 3.4% dividend yield, and at 13x 2016e PE and 7x EBITDA, the stock trades well below semis at 19x/12x. Bullcase is $40-$45/share on 13x-15x PE on our $3/sh EPS power, while downside is $26/sh on 4% implied dividend yield that has historically marked trough."

Archer-Daniels Midland

Archer-Daniels Midland's (ADM) total cash to market cap is 29.1% and net debt (cash) to market cap is -2%, according to the BofA/Merrill Lynch report. The global food processing company's S&P quality rank is B+ and S&P long-term credit rating is A. Its relative weight in large-cap fund holdings is 0.90, the report said.

Archer-Daniels Midland reported dismal first-quarter earnings results on Tuesday. The world's largest corn processor got hammered as the strong U.S. dollar curbed overseas exports, according to Bloomberg. The company reported per-share earnings of 39 cents compared with 77 cents in the year-earlier quarter.

BofA/Merrill Lynch equity analyst Evan Morris has a neutral rating and a $39 price objective on the stock.

"While we still view ADM as a longer-term core [agriculture] holding, we believe near-term operating headwinds will persist at least for a couple more quarters," Morris wrote in a March 7 note in which he downgraded the stock from buy to neutral at the time.

"The company continues to be impacted by a strong USD, which has hurt its U.S. export business, ethanol industry margins that currently are around breakeven on an EBITDA per gallon basis, and crush margins, which are well below year ago levels. Based on our industry work, as well our BofA Merrill Lynch Global Research currency forecasts, we do not see any of these headwinds improving markedly in the near-term to serve as a positive fundamental catalyst," Morris wrote.

Automatic Data Processing

Automatic Data Processing's (ADP) total cash to market cap is 6.7% and net debt (cash) to market cap is -3%, according to the BofA/Merrill Lynch report. The payroll outsourcing company's S&P quality rank is A and S&P long-term credit rating is AA. Its relative weight in large-cap fund holdings is 0.76, the report said.

ADP reported fiscal-third quarter profit that rose 9% year over year, but missed Wall Street estimates, according to the Associated Press. ADP said that new business bookings rose 13%.

BofA/Merrill Lynch equity analysts Sara Gubins has a buy rating and a $40 price objective on the stock.

"We highlight ADP's highly resilient operating model (3% peak-to-trough adjusted EPS decline in the last downturn)," Gubins wrote on April 29.

"While some of ADP's metrics should slow in FY17 (new business bookings on tough comps, pays-per-control as the labor market matures), we expect revenue to benefit from ACA product adoption. We estimate ADP will recognize over $100mn in ACA-related revenue of in CY16. We base our $100 PO on 25x our CY17E EPS, a premium to the 22x three-year average forward P/E, given ADP's positioning in human capital management (HCM) software, U.S. health care reform tailwind, and an eventual benefit from rising U.S. interest rates," the note said. 

C.R. Bard

C.R. Bard's (BCR) total cash to market cap is 6.8% and net debt (cash) to market cap is 2%, according to the BofA/Merrill Lynch report. The health care equipment company's S&P quality rank is B+ and S&P long-term credit rating is A. Its relative weight in large-cap fund holdings is 0.75, the report said.

BofA/Merrill Lynch equity analysts Bob Hopkins has a buy rating and raised his price objective by $31 to $231 on the stock following the company's first-quarter earnings report in which were better-than-expected.

"We think BCR is one of the most strategically attractive, lower risk assets in medtech, but we struggle to see further multiple expansion beyond what we already assume as the expiration of the Gore royalty is getting closer and this fall we will see two-year data from BSX's peripheral drug-coated stent program and data from SPNC's pivotal drug-coated balloon trials (early data presented this week looked promising and increased the chance that a larger player may someday be the primary seller of Stellarex)," Hopkins wrote on April 27. "These are not major issues for BCR in our view, but we think they could limit multiple expansion and leave further upside in BCR more dependent on earnings upside."

Chevron

Chevron (CVX) total cash to market cap is 6.3% and net debt (cash) to market cap was 14% as of March 31, according to the BofA/Merrill Lynch report. The oil and gas company's S&P quality rank is B+ and S&P long-term credit rating is AA-. Its relative weight in large-cap fund holdings is 0.64, the report said.

Along with its $725 million profit loss for the first quarter due to lower oil prices, the energy giant bumped up its planned workforce reduction this year. Chevron now plans to cut up to 8,000 jobs by the end of 2016, or 12% of its workforce, up from between 6,000 and 7,000 employees originally announced. It also plans to reduce its contractor workforce by 6,500, the company said.

BofA/Merrill Lynch equity analysts Doug Leggate has a neutral rating and price objective of $105 on the stock.

"Coupled with the strong rebound in the share price since Sep-15, we believe that appropriate rating is Neutral," he wrote in a note to clients on April 29. "Note that at current levels we estimate that Chevron's share price discount's long-term oil prices in the low $70's - that while below our long term assumption of $75 WTI / $80 Brent, stands at the very high end of the large cap U.S. oils."

Coca-Cola

Coca-Cola (KO) total cash to market cap was 9.7% and net debt (cash) to market cap was 10% as of March 31, according to the BofA/Merrill Lynch report. The beverage company's S&P quality rank is A and S&P long-term credit rating is AA-. Its relative weight in large-cap fund holdings is 0.74, the report said.

Coca-Cola reported first-quarter earnings that beat estimates on both sales and profit. The company also reiterated its full-year targets, including a 4%-to-5% increase in organic revenue this year. However shares slid following the news because Wall Street analysts thought the projections were too optimistic, according to Fortune.

BofA/Merrill Lynch equity analyst Bryan Spillane has a buy rating and price objective of $52 on the stock.

"In our view, 1Q16 results showed that KO is making some progress on developing new earnings levers to relieve pressure from volume growth. We think that ultimately KO will be better able to adapt to volatility in the market place and has more control over the ability to achieve sales and earnings goals," Spillane wrote in an April 20 note to clients. "Our $52 PO targets 25.6x our FY17E EPS of $2.03 and is approximately 240 basis points ahead of its current 2016 P/E. This reflects our view that organic growth should accelerate in FY16 and the LT growth potential given its broad geographic reach."

Edwards Lifesciences

Edwards Lifesciences (EW) total cash to market cap was 6.3% and net debt (cash) to market cap was -3% as of March 31, according to the BofA/Merrill Lynch report. The health care equipment's company's S&P quality rank is B+ and S&P long-term credit rating is BBB-. Its relative weight in large-cap fund holdings is 0.76, the report said.

BofA/Merrill Lynch equity analyst Bob Hopkins has a neutral rating and raised his price objective by $13 to $115 on the stock in an April 22 note.

"Our PO of $115 assumes a 35x multiple on 2017 cash EPS estimate. We think EW should trade at a premium to the average medtech multiple due to our belief in the potential upside with Mitral, strong U.S. TAVR (trans catheter aortic valve replacement) market growth potential, and potential value in the company's next generation TAVI valve pipeline," he wrote in the note.

Emerson Electric

Emerson Electric's (EMR) total cash to market cap was 8.6% and net debt (cash) to market cap was 12% as of March 31, according to the BofA/Merrill Lynch report. The electrical equipment manufacturer's S&P quality rank is A+ and S&P long-term credit rating is A+. Its relative weight in large-cap fund holdings is 0.51, the report said.

BofA/Merrill Lynch equity analyst Andrew Obin has an underperform rating and a price objective of $43 on the stock.

"We think recent rally in the stock, in line with commodity moves, prices in healthy order upturn into the remainder of '16," Obin wrote on April 13, "We maintain our view that growth will likely remain muted with no meaningful order growth acceleration following recent stabilization trends. We also think the Network Power business will get discounted multiple in the 6-7x range post the spin (in line with telecom equipment comparables), reflective of structurally challenged growth outlook and depressed returns. We maintain Underperform on the stock as our SOTP analysis indicates fair value in low-$40s."

Johnson & Johnson

Johnson & Johnson's (JNJ) total cash to market cap was 12.6% and net debt (cash) to market cap was -6% as of March 31, according to the BofA/Merrill Lynch report. The pharmaceutical company's S&P quality rank is A and S&P long-term credit rating is AAA. Its relative weight in large-cap fund holdings is 0.71, the report said.

BofA/Merrill Lynch equity analyst Bob Hopkins has a neutral rating and a price objective of $118 on the stock.

"In our view, JNJ has benefitted from the extreme volatility in the broader market thus far in 2016 (proving the point that JNJ's diversification plays a real role in JNJ's attractiveness to retail investors in times of uncertainty) and JNJ has benefitted from the view that 2016 is a year where JNJ will put its balance sheet to work," Hopkins wrote in an April 19 note to clients. "The recovery in the broader market suggest one factor that has been driving the stock may be less of a factor going forward, and we note that JNJ is trading only slightly below our sum of the parts valuation, and at the high end of its historical trading range. Q1 was a strong quarter, but valuation seems relatively full."

Procter & Gamble

Procter & Gamble's (PG) total cash to market cap was 6% and net debt (cash) to market cap was 8% as of March 31, according to the BofA/Merrill Lynch report. The household goods company's S&P quality rank is A and S&P long-term credit rating is also AA-. Its relative weight in large-cap fund holdings is 0.60, the report said.

P&G reported better-than-expected earnings for the March-ending quarter, however sales volume in just about every segment fell during the quarter.

BofA/Merrill Lynch equity analyst Olivia Tong has a buy rating and a price objective of $89 on the stock.

"PG has made progress cleaning up its portfolio, sampling to generate trial has accelerated, advertising is starting to pick up, with more to come, and management is aggressively tackling costs to provide the fuel to reinvest," Tong wrote in an April 26 note to clients.

"These are the right moves in our view, but initiatives will take time to bear fruit and sales growth for now is being encumbered by the lingering impact of some of these tidying actions," the note said. "As frustrating as it may be that the setup yet again seems to be a 'next year story', we do expect results to improve as FY17 progresses despite the headwinds, with PG driving more brand investment and stabilizing the top line. Higher-margin markets like the U.S. are already improving (organic sales +2% on volume +3%), though this has so far been offset by challenges in emerging markets like China, which is still declining, albeit at a lesser pace."

Qualcomm

Qualcomm's (QCOM)  total cash to market cap was 20.2% and net debt (cash) to market cap was -8% as of March 31, according to the BofA/Merrill Lynch report. The semiconductor company's S&P quality rank is A- and S&P long-term credit rating is also A+. Its relative weight in large-cap fund holdings is 0.72, the report said.

Qualcomm reported better-than-expected earnings results for its fiscal second quarter, but revenue still slid nearly 20% to $5.55 billion in the quarter as the Apple-supplier struggles with opted for modem chips from Intel over those of Qualcomm for its iPhone 7.

BofA/Merrill Lynch equity analyst Tal Liani has a buy rating, but lowered his price objective by $10 to $65 on the stock.

"Despite the positives in the quarter, management issued soft guidance, due to a weak handset market, and lowered its CY16 device outlook," Liani wrote in an April 20 note to clients. "We lower our estimates and PO from $75 to $65 but reiterate our Buy rating. We expect the Snapdragon 820 ramp to lift up QCT revenues and margins, progress with Chinese makers to lift up licensing revenues, and a major QCT margin improvement throughout the year even if Intel gains a position with Apple. We also see the 9% FCF yield and 4% dividend yield limiting the downside for the stock."

Raytheon

Raytheon's (RTN) total cash to market cap was 8.6% and net debt (cash) to market cap was 6% as of March 31, according to the BofA/Merrill Lynch report. The defense contractor's S&P quality rank is A and S&P long-term credit rating is also A. Its relative weight in large-cap fund holdings is 1, the report said.

BofA/Merrill Lynch equity analyst Ron Epstein has a buy rating and a $150 price objective on the stock, according to a Jan. 28 note (the most recent Epstein has published on the company).

"The U.S. Defense Budget Authorization has grown at a 1.8% CAGR in constant dollars since post World War II. However, of the pure play defense primes, RTN has the highest percentage of sales to international customers. In our view, considering the increased global demand for deterrence, we expect RTN's long-term growth to exceed the historical growth of the US defense budget," Epstein wrote in January.

Rockwell Automation

Rockwell Automation's (ROK) total cash to market cap was 14.5% and net debt (cash) to market cap was -3% as of March 31, according to the BofA/Merrill Lynch report. The industrial equipment and software company's S&P quality rank is B+ and S&P long-term credit rating is A. Its relative weight in large-cap fund holdings is 0.65, the report said.

BofA/Merrill Lynch equity analyst Andrew Obin has an underperform rating and a $100 price objective on the stock.

"We highlight that ROK is one of the best-run companies with some of the highest returns in our sector. However, capex trends will weigh on its earnings growth through the cycle," Obin wrote in an April 28 note to clients.