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Cash Rich Firms Screen

Performance

  Cash Rich Firms S&P 500
YTD Return: 18.2% 8.4%
Five Year Return: 10.1% 14.4%
Ten Year Return: 7.3% 6.1%
Inception: 11.8% 4.4%
Data as of 8/29/2014
The Cash Rich Firms Screen represents AAII's interpretation of the investment approach and is not determined by the original strategist. The list of passing companies represents a hypothetical portfolio, which is used to track the screen’s performance on a chart.

Passing Companies

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Screening Criteria

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Chart

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A healthy cash position provides important flexibility and safety to a firm. Cash-rich firms should be able to more easily meet their debt obligations, decreasing the probability of a creditor weakening the position of the equity investors or even gaining control of the firm. During an economic slow-down, cash allows a cyclical firm to continue its research and development efforts, as well as undertake capital expansion or productivity improvements, in anticipation of an economic rebound.

Firms with excess cash positions can also elect to distribute the cash to shareholders in the form of dividends—although double taxation is a weakness to the high payout strategy. The firms pay corporate taxes when they earn the money and shareholders must pay taxes at their marginal tax rate when they receive the dividend. To avoid the double tax, many firms have chosen to use excess cash to repurchase shares on the open market. This helps to boost the share price in the short term by providing demand for shares. And with fewer outstanding shares, the same level of net income boosts earnings per share.

Firms with excess cash can also attempt to use the cash strategically to broaden their product lines or diversify into new areas. This can be accomplished either through direct capital investment or the outright purchase of another firm.

Cash-rich firms can also be attractive acquisition candidates. While much more common in the leveraged buyout craze of the 1980s, the cash prize reduces the actual purchase price of the firm and the cash flow that allowed the cash hoard to be built helps to service the debt incurred acquiring the firm.

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