They say that money can’t buy happiness. Well, that may or may not be true, but of one thing I am certain: Money buys you options.
When you’re looking for stocks to buy, one thing to examine is the so-called “war chest.” See, a company with a lot of cash on hand can expand its business without having to borrow funds or dilute shareholders by issuing new equity. And importantly, they can also reward their shareholders with big dividend hikes or share repurchases. Or, they can simply sit on the cash and save it for a rainy day. And it’s every bit as true for companies as it is for regular people.
But in any event, it’s just about impossible to have “too much” cash on the books.
Today, we’re going to look at four stocks sitting on a mountain of cash. Some have been better stewards of their cash hoards than others, but all have the options at their disposal that comes with being cash-rich.
Given the size of Apple’s (AAPL) cash stash, I feel obligated to mention Apple first.
Apple’s cash balance is the stuff of legend. If AAPL’s cash and marketable securities were a standalone company, they would be just bigger than Walt Disney (DIS) by market capitalization, and just smaller than Anheuser-Busch InBev (BUD). Even allowing for punishing tax rates on Apple’s cash held offshore, Apple has enough cash in the bank to sustain its dividend at current levels for years … without earning a single dime in additional profit.
As of this week’s earnings announcement, Apple had just under $203 billion in cash and securities. That’s about 28% of its gargantuan market cap. And the most amazing thing is that Apple’s cash hoard has continued to expand even while a disproportionate share of it gets dedicated to dividends and share repurchases.
Over the past year, Apple has raised its dividend by 11% and shrunk its shares outstanding by about 5%. And I expect plenty more to come.
Apple’s earnings release had disappointing guidance for the remainder of the year and sent shares sharply lower. I’d view any weakness here as a buying opportunity. While the iPhone 6 upgrade cycle was a one-off event not likely to be repeated, Apple shares are very reasonably priced, and its cash hoard gives it a wide margin of safety.
Next up is Apple’s rival in the smartphone wars, search-engine giant Google (GOOGL).
While Apple’s cash stash gets more attention for the sheer size of the dollars involved, Google’s is nothing to sneeze at. As of June 30, Google had just shy of $70 billion in cash and marketable securities, which amounts to about 14% of its market cap.
Google could take a few lessons from Apple on how to reward its shareholders. Despite being an established tech company and one of the largest in the world by market cap, Google has yet to declare a dividend or commit to a share repurchase.
I want to like Google. I really do. But the company seems to have very little regard for its shareholders. The founders always had something of a stranglehold on the company via their control of supervoting B shares. But following Google’s reorganization last year, which resulted in the creation of non-voting C shares (GOOG), only cemented their control further.
There is a reason why Carl Icahn has focused his activism on Apple and not Google. Not even a billionaire corporate raider like Icahn can cajole an unwilling Google management to part with their cash. There aren’t enough voting shares for him to buy to make a difference.
That said, Google’s cash gives it options. Google is one of the few companies out there that could make a legitimate bid for Twitter (TWTR), for example. And Google, despite its lack of discipline, remains one of the most profitable companies in the world. It also has what Warren Buffett would call an “unassailable moat” in its control of Internet search. Virtually every site in the world, including this one, are built with the express intent of being optimized for Google search.
Google is a fine company and a seriously cash-rich stock.
Just don’t expect to see any of that cash returned to you as a dividend any time soon.
Rounding out cash-rich “Big Tech” companies, we come to Microsoft (MSFT). Like Apple, Microsoft had an earnings announcement this week that was something of a disappointment. While Microsoft actually beat expectations for the quarter, the outlook ahead was nothing to write home about.
The Nokia acquisition has proven to be a disaster and resulted in a massive write-off. And Windows sales remain weak due to continued sluggishness in PC sales. With the post-XP upgrade cycle now complete and Windows 10 not yet available for sale, the next quarter probably won’t be much to look forward to.
Yet the news is by no means all bad. Microsoft’s transition to a cloud-based business services company is progressing faster than expected, and the company is showing an innovative streak under CEO Satya Nadella that it rarely showed under former CEO Steve Ballmer.
And Microsoft’s cash position, at $97 billion, remains one of the largest in the world. It also represents a stunning 26% of Microsoft’s market cap.
Like Apple, Microsoft has come to be very generous with its shareholders. Microsoft has upped its dividend at a 17.5% clip over the past five years in addition to shrinking its share count by about 0.8% over the past three years. Expect more to come.
Stepping away from the world of tech, we get to Warren Buffett’s Berkshire Hathaway (BRK.A).
Buffett is unlikely to ever “retire” from the investment business. He’s a lot more likely to die in the saddle with his boots on. But Buffett has indicated that he would like to hunt one last large elephant of a company before checking out to that big stock exchange in the sky, and accordingly, Berkshire Hathaway has been stockpiling cash.
As of its most recent filings. Berkshire had about $64 billion in cash, amounting to about 18% of the company’s market cap.
I have no special insight as to Mr. Buffett’s last big acquisition. But I can tell you that he has become a little more flexible with how his company’s cash is spent. Buffett has never paid a dividend, arguing (rightly) that it makes more sense to retain the cash for reinvestment. Considering that Buffett — arguably the world’s greatest investor — is the one doing the investing, I would have to agree.
That said, Buffett did authorize a share repurchase plan in 2011, something I never thought I would see. It makes one wonder: Might a dividend really be a possibility?
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long AAPL and MSFT. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
This article first appeared on InvestorPlace.