BALTIMORE (Stockpickr) -- More than ever before, companies are stashing their cash. The S&P 500 alone is up to more than $1 trillion in corporate coffers, the result of record-high profits and a low-interest-rate environment that's kept investment options low.
Don't know what to do with a trillion dollars? Put it under the mattress.
On an absolute basis, companies have never held such high levels of cash in their treasuries. And as a percentage of assets, cash has reached a level that's been unheard of since the 1970s. Around 25% of the S&P's current price is covered by cash in the bank.
But if you think that excessive cash holdings are a drag on performance right now, think again.
Over the last decade, the top tier of cash-rich stocks worldwide generated total returns of 297%. Thats triple what the S&P 500 earned over the same period. Yes, cash is still king this year.
Part of that stellar outperformance has to do with what cash enables companies to do. Capital gains are great, but historically speaking, the majority of portfolio growth comes from other sources. Dividends, share buybacks, and debt repurchases all inject value directly into your shares, and on a year-to-year basis, they also account for around 50% of annual stock performance. Only companies with cash that have the wherewithal to boost those payouts on command.
In short, cash provides options. Firms with cash can opt to increase shareholder value by paying a dividend or initiating a share buyback. Plus, they have the ability to take advantage of pricey M&A opportunities and internal investments.
So today, we're taking a look at five firms that fit the tight set of quantitative criteria that beat the S&P by a factor of 3.
Search engine giant Google ( (GOOG)) is the perfect example of a cash-rich company that didn't sacrifice capital gains for its cash cushion: shares of the $357 billion internet giant have rallied more than 50% since the calendar flipped over to January. Google's net cash and investment balance currently sits at $53 billion, enough to pay for around 15% of the firm's outstanding shares today.
Despite products such as Chrome, Android and YouTube, Google is best-known for being the biggest internet search engine, and that's still the firm's bread and butter. Today, around 80% of sales (and an even bigger chunk of profits) come from search ads. But Google's investments in finding "the next big thing" are more than just a hobby; they're keeping consumers within the Google ecosystem, creating more ways to monetize eyeballs on content.
Google's huge cash position is interesting because the firm is one of the few cash-rich stocks that's using its money for interesting acquisitions. "Interesting" is the operative word here. Transformative acquisitions are too often destroyers of shareholder value, so Google's tuck-in buys mean that shareholders aren't getting left holding the bag.
Recent M&A moves such as robotics firm Boston Dynamics aren't going to change Google's core business overnight, but they're truly innovative firms that the Mountain View, Calif.-based company is likely to do something amazing with. Most importantly, Google can afford to experiment with new businesses as long as ad sales keep growing along the way.
Semiconductor stock Analog Devices ( (ADI)) has had a less inspiring run in 2013; the chipmaker is only up around 16% year-to-date. That's great performance during a normal year, but it's pretty weak when the S&P 500 is 25% higher during the same period.
Still, with semis coming off of a cyclical low, and with a smattering of chip names like ADI holding onto serious cash positions, it may be time to take a closer look. At last count, Analog Devices carried $3.81 billion in cash on its balance sheet, good for about 25% of the firm's current market cap.
Analog Devices is the leader in the market for chips that translate between analog and digital signals, which gives them a role in everything from cell phones to cars. In total, ADI serves more than 60,000 customers worldwide, a broad customer base that exempts the firm from worrying about the fortunes or decisions of a single major customer. Since ADI's chips are just a necessary afterthought in most consumer devices, competition is relatively low -- OEMs would rather just buy them than engineer and build them. The advantages in the market come from ingenious design and from scale, and ADI has both.
New markets present big opportunities for ADI. As more and more products add electronic sensors to them, ADI is finding its way into new niches. Tailwinds in the wireless communications industry should add some extra fuel to an existing one as well. With a 2.8% dividend yield at current levels, ADI is paying cash out to shareholders slowly but surely.
Altera ( (ALTR)) is another specialty chipmaker that's flush with cash right now. Altera is the second-largest designer of programmable logic devices, a subset of chips that can have their circuitry reprogrammed by the manufacturer's clients. While the chips are different from ADI's, the buyers aren't: Altera's customers include original equipment manufacturers of everything from communications devices to automobile components.
Since PLDs can be reprogrammed to carry out individualized tasks, they've historically been a costlier way to add features to a device. But as costs come down and the need for fast movement at electronics makers increases, Altera is getting customers in industries it didn't before. Since newer and higher-end PLDs are particularly suited to lower production runs (their unit cost is cheaper than the huge fixed costs of purpose-built chips), the firm's historic customer base is relatively cost immune -- the chips make up a tiny portion of overall cost of goods sold.
One reason for Altera's stellar balance sheet is the fact that it doesn't manufacture the chips itself. Instead, it has penned a production deal with Intel ( (INTC)) that gives Altera an edge over competitors who don't have access to the most advanced chip foundries in the world. At last count, ALTR's balance sheet cash position weighed in at $2.46 billion.
In the past, News Corp. ( (NWSA)) has been the poster child for value-destroying acquisitions. The firm paid $580 million for Myspace in 2005, only to sell it for $35 million in 2011. Enough said. But after spinning off its entertainment unit into 21st Century Fox (FOX), the "new" News Corp. is hoping to fix its former ills with ample cash on hand. The remaining company owns Wall Street Journal parent Dow Jones (it paid too much for that too), as well as a bigger business in U.K. and Australian newspapers.
After unloading its most well known assets, NWSA actually still owns a very attractive collection of companies. Exposure to partially-owned TV carrier Foxtel and online real estate classified provider REA Group in Australia provide nice complements to the core newspaper businesses. Education investment Amplify has some impressive growth room ahead of it, and it's in a space that's heating up very quickly in the private equity world.
News Corp. has taken a lot from its acquisition mistakes that makes Chairman Rupert Murdoch a lot less likely to repeat them. And anyway, let's not forget that Murdoch and company are no strangers to successful M&A. Right now, NWSA holds $2.7 billion in cash and no debt -- enough to buy back more than a quarter of the firm's outstanding shares at current prices. Expect management to use it well.
GPS giant Garmin ( (GRMN)) takes a lot of flack from investors. After finding huge success in the personal navigation market, Garmin suddenly became an unwelcome name in investors portfolios on fears that GPS devices were becoming too commoditized. Sure enough, we've got GPS chips in everything from our phones and cameras to dog collars today but none of that has turned off Garmin's cash-making machine.
While standalone car GPS units have become a low-margin product, Garmin has managed to add value to its technology by finding creative new ways to put GPS to work -- products such as the Garmin Approach golf watch have been smash hits and big margin contributors. Garmin's positioning in niche markets, like aviation and marine, is key to its strategy. It means that Garmin is able to pour R&D into big-ticket equipment and then transition the tech to the more margin-sensitive consumer market. The result is net profit margins that consistently reach above the 20% mark.
The fitness segment (products for runners, cyclists, and golfers) has been a big growth driver for Garmin, one where it's stood head and shoulders above rivals. And while investors questioned Garmin's fundamentals, the firm has kept packing its flawless balance sheet with cash. Right now, Garmin sports $2.8 billion in cash and investments, with zero debt. It's historically used some of that cash to fund a hefty dividend payout; at present, it amounts to a 3.87% yield.
To see these value-centric names in action, check out the Cash Rich Buys December 2013 portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Follow Jonas on Twitter @JonasElmerraji