Cash Rich Companies to Watch in 2011
Andrew Leckey

p>Cash is king at companies in 2011.

Fear of the economic and regulatory unknown has caused many companies to hoard money. That despite the fact that many Americans, including President Obama, would prefer to see CEOs put some of those dollars into hiring unemployed workers.

Cash-rich companies are in excellent financial position to increase their dividends, buy back their own shares, make prudent acquisitions of weaker competitors, and invest in research and development. Their stock could also be worth more than the price indicates because so much money is stashed in the company safe.

Such firms are the most likely to emerge from a down economy in excellent financial shape, ready to take off in better times. This makes them logical possibilities for post-recession investing.

"There is a record level of close to $1 trillion in cash sitting on balance sheets of the Standard & Poor's 500 because companies are reticent to put cash to work," noted Arthur Hogan, director of global equity product for Jefferies & Co. in Boston. "It's difficult to blame them, for they are afraid of a double-dip recession if the economy doesn't pick up."

Due to increased government regulations, financial services firms have higher reserve requirements than in the past. Yet holding cash for a rainy day has extended to virtually all types of industries. Hogan considers this overkill when viewed in light of improving estimates for the gross domestic product and corporate earnings. Overall circumstances are simply better, he is convinced.

"As a shareholder you're just as happy seeing dividends raised, share buybacks or acquisitions," said Hogan. "But altruistically, you'd also like to see the money being used in job creation, factory building and expansion of businesses so more manufacturing is done here instead of overseas."

Cash-rich companies are best suited for investors who don't like surprises and who prefer safety cushions in their financial vehicles.

Experts consulted for this article suggested taking a closer look at these famous "big dogs" in cash:

Microsoft (MSFT)

The software giant that generates more than $1 billion in cash flow each month, has bought back large amounts of its own stock and has an AAA debt rating. Its wealth of cash for research and development makes it one of the few firms with the technology and financial resources to invest heavily in cloud computing, the emerging field in which hosted services are delivered on-demand over the Internet.

Nike Inc. (NKE)

The world's largest athletic footwear and apparel maker, enjoys an enormous cash cushion and is committed to returning cash to its shareholders. That strategy includes $5 billion in planned share repurchases over the next five years and ongoing dividend growth. Steady cash flow can also be used for acquisitions.

McDonald's Corp (MCD)

The fast-food powerhouse, has a massive cash flow and substantial cash cushion because it receives franchisee royalties and rent payments even when the economy is doing poorly. It boasts a three-decade history of paying cash dividends and repurchasing shares.

"Put yourself in the place of the CEO, whose mandate it is to protect shareholders," said Kelley Wright, managing editor of Investment Quality Trends newsletter in Carlsbad, Calif. "If the CEO thinks hoarding cash is good because of uncertainty about what's next in the economy, then that is what will be done."

Not that it is always a good thing. Having a lot of cash can sometimes mean that money isn't being spent where it should be to improve the overall business. We are exiting the period in which cost-cutting was revered for cost-cutting's sake alone. The reality is that firms can't really grow by cutting back.

"Look at where a company's cash is coming from -- whether it is from sales and it is just booking the cash, or whether it is selling assets or closing plants," added Wright. "You don't want to see all that cash coming from shrinking its business."

As far as companies worth watching, Hogan notes previously mentioned Microsoft, along with Google (GOOG) and Boeing (BA). He is surprised that cash-rich IBM (IBM) and Honeywell (HON) are actually issuing debt even though they have such large amounts of cash on their books. Wright also points to Nike and McDonald's, as well as Altria Group Inc. (MO) and Johnson & Johnson (JNJ), as companies with money on hand and modest short-term liabilities.

"A company having a large cash reserve may mean it is a mature company with growth prospects that aren't as good as they once were," cautioned Steven Goldman, senior market strategist with Weeden & Co. in Greenwich, Conn. "Those types of stocks will do especially well in a defensive environment."

Goldman points to Microsoft, Apple Inc. (AAPL) and Caterpillar Inc. (CAT) as notable examples of cash-rich companies. Ford Motor Co. (F) issued considerable debt just before the economic downturn, so it had ample cash on hand to weather the storm, he added.

"Companies will definitely be more confident in 2011 than they were last summer, which had all those euro troubles," concluded Goldman. "However, they still remember what went on in the financial crisis and continue to allocate cash to the unforeseen economic and systematic risks that these days seem to be more prevalent than ever before."

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