Over the past few years, many companies have turned ultra-conservative and, instead of splurging in areas like M&A and R&D, are building massive cash war-chests. This is happening because many senior executives saw less liquid and highly leveraged (operating and financial leverage) competitors go bankrupt during the tech implosion and financial crash. By squirreling away cash, these executives made their companies more resilient to short-term funding crises and revenue shocks.
Today, however, many companies have become giant cash cows waiting to burst - they are sitting on so much cash that it has become a potential drag on the business. Cash stored beyond the needs of a potential funding crisis translates into inefficient use of capital.
Inefficient capital allocation effectively means that these companies are potentially suppressing stock returns by 'investing' in assets that don't cover the firm's cost of capital [i.e. negative net present value (NPV) investments], like short-term deposits and money market securities. Often, executives hoard cash rather than redistribute it to shareholders, so they can build corporate empires through unnecessary diversification, expansion or M&A. Unfortunately, these imperialistic endeavors frequently end up eroding shareholder value.
Shareholders are beginning to revolt, since they don't want to pay for an expensive corporate infrastructure simply to manage cash. Moreover, investors can often find better alternative uses for the cash within the universe of investments. Consequently, investors are demanding cash be returned to them through dividends and share buybacks.
Below, I have listed 20 large-cap companies with cash levels greater than total debt. [Of course, two of these companies (Apple and Amazon) have no debt so it only makes sense that cash levels at these companies exceeds debt. However, there are other indications that the cash levels at these companies might be excessively high.]
| Company | Ticker | Industry |
| Apple Inc. | (AAPL) | Computers/Peripherals |
| Amgen | (AMGN) | Biotechnology |
| Amazon.com | (AMZN) | Internet |
| AstraZeneca PLC | (AZN) | Drug |
| Bristol-Myers Squibb | (BMY) | Drug |
| Bank of Nova Scotia | (BNS) | Bank |
| Canon Inc. ADR | (CAJ) | Foreign Electronics |
| China Mobile Hong Kong Ltd | (CHL) | Telecom. Services |
| Cisco Systems | (CSCO) | Telecom. Equipment |
| Chevron Corp. | (CVX) | Petroleum (Integrated) |
| Google Inc. | (GOOG) | Internet |
| Intel Corp. | (INTC) | Semiconductor |
| Johnson & Johnson | (JNJ) | Med Supp Non-Invasive |
| Microsoft Corp. | (MSFT) | Computer Software |
| Novo Nordisk ADR | (NVO) | Drug |
| Oracle Corp. | (ORCL) | Computer Software |
| Qualcomm Inc. | (QCOM) | Telecom. Equipment |
| Royal Bank of Canada | (RY) | Bank |
| Taiwan Semic. ADR | (TSM) | Semiconductor |
| Visa Inc. | (V) | Financial Svcs. (Div.) |
The following table shows just how many times balance sheet cash covers existing debt:
| Ticker | Cash to Debt |
| AAPL | n/a |
| AMGN | 1.60 |
| AMZN | 11.70 |
| AZN | 1.36 |
| BMY | 1.34 |
| BNS | 1.72 |
| CAJ | 82.74 |
| CHL | 8.68 |
| CSCO | 2.65 |
| CVX | 1.49 |
| GOOG | 10.09 |
| INTC | 10.35 |
| JNJ | 1.65 |
| MSFT | 4.43 |
| NVO | 5.40 |
| ORCL | 1.81 |
| QCOM | n/a |
| RY | 1.40 |
| TSM | 4.17 |
| V | 87.89 |
It's nice to have enough cash to cover total debts, but at some point the war-chest needs to be used. Either the companies have positive NPV projects to invest in or they don't.
Since not all companies have debt, below is a calculation showing cash as a proportion of total assets. Regardless of their capital structure, it appears most of these companies are hanging on to big cash stashes.
| Ticker | Cash as % of Total Assets |
| AAPL | 22.30% |
| AMGN | 40.06% |
| AMZN | 46.61% |
| AZN | 22.36% |
| BMY | 23.50% |
| BNS | 1.94% |
| CAJ | 23.53% |
| CHL | 33.92% |
| CSCO | 51.19% |
| CVX | 9.24% |
| GOOG | 60.46% |
| INTC | 34.64% |
| JNJ | 26.88% |
| MSFT | 48.55% |
| NVO | 19.57% |
| ORCL | 39.23% |
| QCOM | 33.62% |
| RY | 1.28% |
| TSM | 25.26% |
| V | 11.58% |
What's more is that many of these companies have very low dividend payout ratios - I think they can afford to increase dividends without even having to touch their cash hoard. There is probably ample opportunity to return cash to shareholders.
Ticker | Payout Ratio |
AAPL | 0.00% |
AMGN | 19.96% |
AMZN | 0.00% |
AZN | 0.00% |
BMY | 74.37% |
BNS | 51.19% |
CAJ | 53.78% |
CHL | 0.00% |
CSCO | 19.81% |
CVX | 33.94% |
GOOG | 0.00% |
INTC | 36.80% |
JNJ | 46.94% |
MSFT | 29.07% |
NVO | 40.59% |
ORCL | 10.59% |
QCOM | 41.56% |
RY | 58.83% |
TSM | 48.61% |
V | 24.34% |
While it may sound like I'm 'bashing' these companies, I'm not. I believe that companies holding excess cash and investing in low NPV projects are just begging for a catalyst to straighten out capital allocation and unlock shareholder value. Whether that catalyst is unlocked from within or by a corporate raider doesn't matter to me.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Data source: latest available US stock data from Damadoran Online. This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.
