The Federal Reserve reported that non-financial firms held over $2 trillion in cash on their balance sheets at the end of June, the highest level since 1945. Cash accounted for 7.1% of company assets. Firms are hoarding cash in an environment of economic uncertainty as protection against the type of credit squeeze that occurred in 2008. Adequate cash reserves can help fund research and development, make dividend payments, buy shares back, entice buyout offers, or even acquire other firms. While companies may enjoy the financial freedom of cash, economists fear that a lack of corporate investment and spending may help push the economy into a recession. Since cash earns little return on investment, a critical question to ask is why a company is holding on to its cash.
This issue’s First Cut focuses on firms trading with a high level of net cash per share relative to their share price. Net cash is a traditional measure of excess cash and is calculated by totaling cash, marketable securities and short-term investments and subtracting current liabilities. Beyond high net cash levels, firms making the First Cut have positive earnings and operating cash flow, as well debt levels below the norm for their industry. Financial and utility stocks were excluded because of their unique nature and special cash holding requirements. The 30 stocks with the highest levels of net cash as a percentage of share price made the First Cut. The table also displays the level of net cash relative to total assets. The dividend yield highlights firms paying out some of their cash holdings directly to investors. The listing also includes the price-earnings ratio as a basic valuation measure, the earnings growth rate to examine recent growth, and the 52-week relative price strength to highlight stock market performance relative to other companies. A high net cash level relative to share price or assets does not ensure financial strength or price stability; however, it allows effective managers to fund operations and invest in the
—John Bajkowski, President of AAII
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