Cash Mirages: S&P 500 Companies with Large Balances But Not So Visible Liabilities

We all know that "cash is king" these days. As investors continue to change the ways they look at companies, clearly they appreciate more than ever substantial cash reserves on the balance sheet of companies in which they invest. Unfortunately, appearances and reality aren't always the same. While a company may show a large cash balance, often there is something on the other side of it, whether it is debt or some other liability.

Imagine a company that has no debt and no cash. It sells a bond to the public and pockets the cash. Is it richer or in any better long-term financial situation than before? No! There are many examples of non-debt liabilities that can act as claims on cash, like deferred taxes or deferred revenue, and there are asset impairments (such as AR or Inventory) that can create a short-term claim on cash as liabilities must be met. A whole other issue is that often cash is domiciled off-shore or restricted in some way. Suffice it to say, the reported cash is never understated and often potentially overstated.

I wanted to look at some "cash rich" stocks, so I took all of the S&P 500 companies with $5 billion or more in "cash and short-term investments". To see if there were claims on that cash, I compared the current assets and the current liabilities. I then defined the notion of "free" cash by crediting all of the cash in excess of the difference of CA and CL, up to the amount of cash. So, for example, if a company has $1 billion in cash and its CA exceeds its CL by $1.5 billion, then all $1 billion of its cash is "free". On the other hand, if its CA exceeds its CL by just $300mm, then it has "free" cash of just $300mm. While this isn't scientific by any means, it gives a general sense of how available the cash might be.

The 30 stocks are sorted by cash as a percentage of market capitalization. Note that I did make an adjustment to both United Health (UNH) and Lilly (LLY) for long-term investments. I considered that adjustment only for companies whose cash appeared to be a mirage (so, UNH was OK after the adjustment). The results of this analysis (click on chart to enlarge) indicate that Lilly (LLY), Procter & Gamble (PG), Verizon (VZ) and Wal-Mart (WMT) aren't as cash-rich as a naive analysis might imply. The bigger takeaway is that investors need to dig deeper than just looking at stated cash.

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Disclosure: No position in any stock mentioned

Comments

[The Good Ne...:]

Thanks for this chart and the model used to create it. Creation of the "free cash" column indeed provides additional insights into the real "strength" of a firm's "cash position."

Mar 18 03:23 AM

[kewgardens:]

Your chart implies that the dividends from both INTC and BMY are safe for the time being, no?

Mar 18 05:55 AM

[Alan Brochs...:]

Thanks. It's just a start, and it might be too simple, but sometimes simplicity is best. I wouldn't use this type of analysis in a vacuum, but, I believe it makes sense combined with some of the other things I have been doing.

On Mar 18 03:23 AM Good News Economist wrote:

> Thanks for this chart and the model used to create it. Creation of
> the "free cash" column indeed provides additional insights into the
> real "strength" of a firm's "cash position."

Mar 18 06:15 AM

[Alan Brochs...:]

I don't believe that a high cash balance is sufficient to make a decision about the viability of a dividend, but it certainly helps. INTC has an extremely strong balance sheet, but the dividend is in excess of its earnings for this coming year. While INTC could pay that dividend for quite some time while even generating losses, I am unable to judge whether or not they would do so. BMY doesn't have as strong a balance sheet, but it too certainly doesn't need to slash its dividend anytime soon. The payout ratio there is reasonable. Further, the company didn't cut the dividend a few years ago when EPS were soft

Bottom-line: One can never tell, but these two don't seem to be likely candidates to cut the dividend.


On Mar 18 05:55 AM kewgardens wrote:

> Your chart implies that the dividends from both INTC and BMY are
> safe for the time being, no?

Mar 18 06:22 AM

[rd4sndk:]

How can you use CA - CL and not consider the average cash generated by operations? I could believe your matrix if it included not just the assets and liabilitie due this current year but it should also include the expected cashflow from operations due this current year. Those assets which where paid for by the companies liabilities where acquired under the presumption that they will generate earnings. It is from these earnings that the liabilities are funded. This is why many of us believe Apple and GE is insanely under valued.

Mar 18 07:20 AM

[Alan Brochs...:]

You make a fair point, though it's all relative, isn't it? The weaker ones will still look weak relatively even if one includes future cash. With that said, though, I didn't haircut the non-cash assets, which, in this downturn, isn't conservative enough. Also, don't forget to subtract out dividends...

Mar 18 07:45 AM

[VP of Commo...:]

To me the shocking ones on this list were P&G and Walmart. This makes me think that although every analyst on CNBC is claiming WMT is the only retail stock they like, the reality is WMT is effectively an anti-equity such as gold or bonds. Once the recession starts to mitigate WMT is alsolutely where I wouldn't want to be.

Mar 18 08:04 PM

[jstratt:]

Thank you for some excellent information!

I had done some research on PG and recognized they had more debt than one would guess without looking. However a comparison of many different big name investment opportunities provided a very interesting perspective.

So far I view most of the companies on the list as safe and able to support business operations. It is their ability to maintain and grow earnings which is intriguing at this point. Verizon as an example is investing heavily in building its business with FIOS and could slow the speed of that growth if additional cash was needed.

While free cash is important just having cash is not as important as what is being done with it. I happen to believe in a strong cash position. At the same time I am waiting to see some big companies find a productive use for it. Perhaps IBM and Pfizer will be the first ones to do so, but the jury is still out.

Mar 18 08:34 PM

[Mad Hedge F...:]

I have a question, Mr. Market. If General Electric (GE) got down to $5, Bank of America (BAC) $2, and Citigroup (C) to $1, where were the share buybacks? Are these companies too broke to buy their own shares, or do they think a few bucks over zero is too much to pay? I’m not sure I like either answer, or even my own question.

Mar 18 08:41 PM

[Ricard:]

Agreed...this chart is simplistic. I suppose it's good for those who don't even take current/quick ratios into consideration...


On Mar 18 06:15 AM Alan Brochstein wrote:

> Thanks. It's just a start, and it might be too simple, but sometimes
> simplicity is best. I wouldn't use this type of analysis in a vacuum,
> but, I believe it makes sense combined with some of the other things
> I have been doing.
>
> On Mar 18 03:23 AM Good News Economist wrote:

Mar 18 09:05 PM

[Lee Eugene ...:]

I'm not sure how your point is relevant to this report. I think Alan did a great job in making the point that you need to understand how much cash a firm has. All too often I read mainstream media report on top dividend paying stocks and high cash balance. All they do is troll through a database and don't know the first thing about balance sheet analysis. Good job Alan!


On Mar 18 08:41 PM The Mad Hedge Fund Trader wrote:

> I have a question, Mr. Market. If General Electric (seekingalpha.com/symbo...)
> got down to $5, Bank of America (seekingalpha.com/symbo...)
> $2, and Citigroup (seekingalpha.com/symbol/c) to $1, where
> were the share buybacks? Are these companies too broke to buy their
> own shares, or do they think a few bucks over zero is too much to
> pay? I’m not sure I like either answer, or even my own question.

Mar 18 09:19 PM

[BxCapricorn:]

I negatively commented to you in the past, and you were correct then, and you are correct now. Like Ross Perot and an Illinois farm, I'm all ears.

Mar 18 09:58 PM

[Moon Kil Woong:]

Yes free cash flow means more than either assets or liabilities. Oops, that is unless the cash is too low to meet current liabilities ^^. Then you are in deep trouble no matter what profit you're making.

Mar 19 01:27 AM

[Alan Brochs...:]

I wrote negatively on WMT in mid-January (seekingalpha.com/artic...) and remain negative. It faces some fundamental challenges in my opinion. I agree with your point about an ultimate investor exodus when the economy resumes growth, but I think that the stock could face pressure in the weak economy too.


On Mar 18 08:04 PM VP of Common Sense wrote:

> To me the shocking ones on this list were P&G and Walmart. This
> makes me think that although every analyst on CNBC is claiming WMT
> is the only retail stock they like, the reality is WMT is effectively
> an anti-equity such as gold or bonds. Once the recession starts to
> mitigate WMT is alsolutely where I wouldn't want to be.

Mar 19 06:30 AM

[Alan Brochs...:]

At a time that stock prices are extremely depressed, the companies not only can't repurchase shares, but they are chopping dividends as well (which prevents some shareholders from using the cash to buy more shares). It has nothing to do with what they think the stock is "worth" - look at all the GE and BAC insider buying. The problem is that their corporate charge cards are maxed out!

These companies have in some ways created a Madoff-like scenario (though legally), where the money from new buyers (of debt) was used to pay off old investors (share repurchases) or to buy other businesses to keep up growth. The debt and liability balances have soared, but the lenders have been forced to wise up. This means that potentially the stocks are worthless unless these companies can restructure the timing and perhaps ultimately the size of their debt.


On Mar 18 08:41 PM The Mad Hedge Fund Trader wrote:

> I have a question, Mr. Market. If General Electric (seekingalpha.com/symbo...)
> got down to $5, Bank of America (seekingalpha.com/symbo...)
> $2, and Citigroup (seekingalpha.com/symbol/c) to $1, where
> were the share buybacks? Are these companies too broke to buy their
> own shares, or do they think a few bucks over zero is too much to
> pay? I’m not sure I like either answer, or even my own question.

Mar 19 06:40 AM

[Alan Brochs...:]

I not recall your prior comment. I may have been "right" then and perhaps now, but I assure you I will be "wrong" at times as well. Feel free to "negatively comment" whenever you see fit!


On Mar 18 09:58 PM BxCapricorn wrote:

> I negatively commented to you in the past, and you were correct then,
> and you are correct now. Like Ross Perot and an Illinois farm, I'm
> all ears.

Mar 19 06:44 AM

[lemoneater:]

Thanks for the insightful article. I'm glad when others with more knowledge than I have cut through the fog. Have a good day!

Mar 19 09:52 AM

[User 379205:]

Your analysis penalizes firms that carry negative working capital. In my experience, a firm that negotiates terms where its suppliers finance this burden is stronger, not weaker. Granted, you did not break out ST debt from ST liabilities, but I think you'll find the point is still valid.

Mar 19 10:58 AM

[Alan Brochs...:]

You make a valid point. I wouldn't use this exercise exclusively to make a determination of balance sheet quality, but I believe that it can be a helpful starting point.


On Mar 19 10:58 AM User 379205 wrote:

> Your analysis penalizes firms that carry negative working capital.
> In my experience, a firm that negotiates terms where its suppliers
> finance this burden is stronger, not weaker. Granted, you did not
> break out ST debt from ST liabilities, but I think you'll find the
> point is still valid.

Mar 19 02:39 PM