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Making a Pile on Cash-Rich Companies

Call it corporate America's version of the Strategic Petroleum Reserve. As companies have been racking up record earnings over the past few years, they've let cash pile up rather than plow it into new hiring and capital spending. Now they're sitting on a massive reservoir of untapped fuel. "There's going to be increasing pressure on companies to get rid of that cash and start paying it out in dividends," says Donald A. Yacktman, who manages two mutual funds.

For investors, some of the best opportunities to profit from this cash may lie in the drug sector. Yacktman's favorite pick there is Bristol-Myers Squibb Co. (BMY). The bad karma hanging over pharmaceuticals has beaten down the stock. And its restatement of past earnings, after it settled charges in August that it had improperly booked $1.5 billion in revenues, didn't help either. Yacktman believes Bristol-Myers has cleaned up its act -- and is a compelling buy at just 17 times its estimated 2005 earnings. "It's still a very profitable drug company," he says. He also believes that Bristol-Myers' strength in cancer research is going to pay off if drugs that have completed many of their clinical trials -- such as Ixabepilone, which shows promise in fighting prostate and metastatic breast cancer -- come to market. Meantime, there's $7.25 billion of cash sitting on the company's balance sheet, which Yacktman expects will be deployed soon, either to raise dividends or make an acquisition.

Sometimes the best play is a company in turnaround mode with a hefty cash hoard -- promising not just rising payouts but also a boost in the stock price as earnings start to pick up. One such outfit may be Cigna Corp. (CI), says John DeGulis, who runs the $1.6 billion Sound Shore Fund (SSHFX), which invests in large-cap value stocks. The Philadelphia health insurer has suffered massive customer defections in recent years because of computer glitches that caused it to fall way behind in paying and adjudicating claims. Enrollment fell 16% in 2004, and is set to drop an additional 8% in 2005, notes DeGulis. But he thinks Cigna has finally solved the problems of integrating its myriad computer systems, and it should see its customer rolls begin to stabilize at some point in the coming year.


Helping Cigna through this rough patch has been its mountain of cash. It has built up roughly $2.92 billion, a stockpile that works out to nearly $22 for every share currently trading around $81. DeGulis expects Cigna to use this cash for either stock buybacks or a sharp hike in its dividend, now a mere 10 cents a share. And he estimates that Cigna will generate an additional $600 million in free cash this coming year. "That's worth 20% of the market cap right there," he says.

Outside of health care, some of the biggest stashes are to be found in the technology sector, where companies can earn hefty margins without taking on much, if any, debt. Bartlett R. Geer, lead manager of the $3.47 billion dividend-focused Putnam Equity Income Fund, likes Siebel Systems Inc (SEBL). The San Mateo (Calif.) maker of call-center and sales-force software fell out of favor on Wall Street as it lost ground to rivals such as SAP (SAP) and (CRM). But some analysts believe that new CEO J. Michael Lawrie has brought a focus and rigor to the company that was lacking under co-founder Tom Siebel. And Geer notes that Siebel, whose stock trades at around $10, now boasts a nice cushion of $4.24 per share in net cash on its balance sheet -- enough to suggest that Siebel could begin paying a dividend at some point.


The kicker, however, is that Geer believes Siebel could become a takeover target, perhaps for one of the larger software makers. Indeed, evidence that Oracle Corp. (ORCL) submitted last summer in an antitrust trial revealed that Siebel was one of seven software companies the giant has considered purchasing. "When Oracle gets done with PeopleSoft Inc. (PSFT), you would think they might take a look at Siebel," Geer says.

Altria Group Inc. (MO), the tobacco giant formerly known as Philip Morris Cos., might also prove to be a tempting investment. Even with its current 5.1% dividend payout, Altria maintains a war chest of $6.67 billion, or $3.25 a share. For now, the company is keeping part of that cash in case it needs to pay bonds in pending wrongful-death class-action suits in Florida and Illinois and in a federal suit filed by the Justice Dept. But Geer believes that Altria could resolve some or all of this litigation during 2005 -- freeing it to pursue a spin-off move of its Kraft Div. as well as to boost its dividend. "At some point, some of that cash becomes usable," says Geer.

Of course, it isn't just the large companies that are counting oodles of cash. Among smaller ones, James M. Tringas, manager of the $2 billion Evergreen Special Values Fund (ESPAX), which invests in small-cap value stocks, likes Arkansas Best Corp. (ABFS), a transportation outfit that specializes in handling shipments that amount to less than a full truckload. With demand booming, Arkansas Best's profits have grown an average of 21% annually during the past five years. That has in turn boosted its cash to $50 million -- or $1.80 a share -- and the company continues to generate more than that in free cash flow every year. Tringas estimates that within a couple of years, Arkansas Best will be holding the equivalent of $10 a share in cash, which he believes the company will begin paying out in special dividends. "They'll be significantly overcapitalized," he says. "And they're not likely to use all of that cash just to buy back stock."

The comeback of coal is boosting another small-cap outfit. Joy Global Inc. (JOYG), a Milwaukee maker of equipment for coal and copper mining ranging from roof supports to shuttle cars, currently has $170 million in the kitty. Joy is benefiting from the increasing reliance of utilities on coal to fire their power plants.

And the company is getting a boost from a big customer: the growing Chinese coal industry, which could surpass the U.S. industry in five years. Tringas believes that Joy will generate as much as $500 million in free cash flow in the next several years, which could be used for either niche acquisitions or to beef up its current 45 cents-a-share dividend, which represents just a 1.1% yield. "They could raise the dividend significantly from where it is," says Tringas. That's certainly what investors who hunt out cash-rich companies like to hear.

By Dean Foust

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