With hedge-fund investor David Einhorn pressuring Apple ($449; AAPL) to distribute more to investors, corporate cash-hoarding has become a hot issue. Einhorn wants Apple to issue a new type of preferred stock paying a 4% dividend rather than holding onto its more than $137 billion in cash and marketable securities. So far, Apple has shown no interest in the plan.
Apple makes the most headlines, but the issue of cash hoarding goes far beyond the seller of iPads and iPhones. Among the 395 nonfinancial companies in the S&P 500 Index with five years of history, total cash was $1.21 trillion at the end of their most recent quarters, up from $703 billion five years earlier.
Why are companies hoarding their cash? Some still remember 2008, when the bond market dried up, making it nearly impossible for even financially strong companies to issue debt. Borrowing has become easier in recent months, yet many companies remain reluctant to commit their cash.
In addition, S&P 500 companies hold more than half of their cash overseas. And given that some companies are willing to borrow in the U.S. to fund dividends or stock buybacks — rather than repatriating foreign cash and paying U.S. taxes on it — we probably won't see much of that foreign cash distributed until the tax situation changes.
When companies hold a lot of cash, the most common valuation ratios may understate their value. For example: Cisco Systems ($21; CSCO) holds net cash of $30 billion, equating to 27% of the stock's market capitalization, or $5.62 per share. The stock trades at 11 times trailing earnings, but just eight times earnings if you wash out the cash.
The enterprise ratio takes cash into account. Enterprise value reflects a company's stock-market value plus the value of its debt and other equity interests, minus its cash — a theoretical takeover price. To calculate the ratio, we divide enterprise value by earnings before interest, taxes, depreciation, and amortization (EBITDA).
The enterprise and cash-adjusted P/E ratios are valid if a company is likely to distribute its cash in dividends or share buybacks. Of course, many companies just hang onto their cash or, worse, squander it on ill-conceived acquisitions. Noted hoarders Microsoft ($27; MSFT) and Hewlett-Packard ($20; HPQ) are among the many companies falling into the acquisition trap in recent years.
In the table below, we list six stocks with strong cash positions and enterprise ratios, and cash-adjusted P/E ratios below the medians for their industry (also excluding cash). All have either raised their dividend or repurchased shares over the last year.