The pressure is on for companies hoarding enormous amounts of cash. Investor activists like Carl Icahn have been hounding cash-rich companies to put their unspent dollars to use for their shareholders. The question is, which cash-laden company could be next in the crosshairs?
Icahn's latest target was Motorola (MOT). On Jan. 30, the cell-phone maker disclosed that the billionaire financier was seeking a seat on its 13-member board of directors (see BusinessWeek.com, 1/31/07, "Icahn Sets His Sights on Motorola"). In recent years, Icahn has also pushed for change at ImClone Systems (IMCL), Time Warner (TWX), and Lear (LEA).
Motorola was sitting on $14.8 billion in cash as of Sept. 30, 2006, according to Standard & Poor's(MHP). That would be good enough to place the handset maker among the five U.S. stocks with the biggest cash stockpiles as tracked by S&P. However, a Motorola spokesman says the company's "gross" cash position—adjusted for acquisitions—was a significantly smaller $11.3 billion at the end of 2006. (Motorola plans to make a regulatory filing next week to resolve this confusion.)
It can be tricky to determine which companies are truly the most cash-rich. Not all report their cash levels, observes Howard Silverblatt, S&P's senior index analyst. Based on available data, this week's Five for the Money looks at the five companies with the biggest cash hoards—not including Icahn's latest target.
1. Exxon Mobil (XOM)
The sheer size of Exxon Mobil helps ensure its place atop this list, but a recent string of record profits certainly didn't hurt. The oil giant has $37.4 billion in cash, equivalent to 8.5% of its market value and 577.6% of the company's long-term debt, according to S&P. Exxon's massive market value—roughly fives times the number for Time Warner, and nearly 10 times that of Motorola—also tends to insulate it from shareholder activists like Icahn.
Exxon hasn't just been letting its cash collect dust, though. The Irving (Tex.)-based company has consistently been at the forefront of Corporate America's recent trend of buying back its stock (see BusinessWeek.com, 8/28/06, "Buyback Binge: Bane or Boon?"). Exxon distributed $32.6 billion to shareholders last year through dividends and share repurchases, a 41% jump from 2005.
The company's 2005 earnings topped Wal-Mart's (WMT), Microsoft's, and Johnson & Johnson's (JNJ) combined, notes Morningstar (MORN) analyst Justin Perucki. "Any way you slice them, the figures are impressive," Perucki notes in a Feb. 1 research report. "With more cash than debt and an 87-year-old AAA credit rating, the company's financial strength is almost unrivaled."
2. Microsoft (MSFT)
Calls to spend its cash pile must be nearly as familiar to Microsoft as the old Windows startup sound. Last year, the software giant answered some of that criticism by unveiling a plan to repurchase as much as $40 billion in stock over the next five years (see BusinessWeek.com, 7/21/06, "Microsoft Buyback: Should You Bite?").
So far, the buyback splurge has only begun to dent the Redmond (Wash.)-based company's formidable cash stockpile. According to S&P, Microsoft has $28.9 billion—10.2% of its market value—in cash and no long-term debt.
The company has also boosted spending as it battles rivals like Google (GOOG). Goldman Sachs (GS) projects a $2.7 billion increase in Microsoft's operating costs for fiscal 2007, followed by a $3.2 billion rise in 2008. "It is our sense that customer acquisition costs are not yet well formulated and that competitive pressures may escalate costs," says Goldman analyst Rick Sherlund in a Feb. 15 report. (Goldman has an investment banking relationship with Microsoft and makes a market in its securities.)
3. Cisco (CSCO)
Cisco has a bit less cash at its disposal than the software giant. Proportionally, though, the networking equipment maker's $19.5 billion cash hoard isn't far off, according to S&P data. That sum represents 11.6% of Cisco's market value and 302.4% of its long-term debt.
Again, it's not as if Cisco hasn't been spending. The San Jose (Calif.)-based company continues to make acquisitions, such as the $135 million deal announced on Feb. 21 for router maker Reactivity and last year's $6.9 billion Scientific Atlanta takeover. Cisco has been another company leading the wave of stock buybacks, cutting its share count sharply through more than $40 billion in repurchases (see BusinessWeek, 1/23/06, "The Dirty Little Secret About Buybacks").
Looking ahead, Cisco's gross margins may decline while spending on new products and sales coverage products ramps up, some analysts say. A push into emerging markets could put pressure on margins now while driving earnings growth down the road, according to CIBC World Markets analyst Ittai Kidron. "Though some level of margin impact is possible, the aggressive penetration into these growth markets has led, and will continue to lead to upside and offset more mature and slow growing North American, Western European and Japanese markets," Kidron wrote in a Feb. 7 report. (CIBC has an investment banking relationship with Cisco and makes a market in its securities.)
4. Hewlett-Packard (HPQ)
Last year's leaks scandal did nothing to sink Hewlett-Packard's status among the most cash-rich companies on Wall Street (see BusinessWeek.com, 7/7/05, "Meet Tech's Cash-Rich Royalty"). HP has amassed a cash stockpile of $16.4 billion, according to S&P. That's a whopping 652.9% of the software maker's long-term debt and 13.9% of its market value.
What does the Palo Alto (Calif.)-based company plan to do with all that cash? For now, CEO Mark Hurd aims to continue aggressively cutting costs (see BusinessWeek.com, 2/21/07, "HP Bests Dell, Again"). HP may eventually have to spend to maintain its market share lead over Dell (DELL) in computing and Eastman Kodak (EK) in printers. The company will also likely keep buying back stock, after repurchasing $2.3 billion of its shares in the three months ended Jan. 31.
Strategic acquisitions could be another possibility, according to Citigroup (C) analyst Richard Gardner. In addition, Gardner notes that the company has been investing in future growth, hiring 1,000 new salespeople in its commercial printing and enterprise division. "HP remains one of our top 2007 picks," he says in a Feb. 21 report. (Citigroup has an investment banking relationship with HP and makes a market in its securities.)
5. Aetna (AET)
Talk about a healthy cash stockpile. Aetna sits on $14.7 billion in cash, according to S&P, just a bit less than Icahn's recent target Motorola. The health insurer's ratio of cash to long-term debt, at 602.4%, actually dwarfs those of the companies above it on this list. In fact, Aetna's cash hoard represents 60.8% of its market value.
Like its cash-rich peers, Aetna has poured some of its money into stock buybacks, including $2.3 billion in 2006. On Feb. 8, S&P downgraded the shares to hold from buy, citing in part the company's reliance on share repurchases to boost earnings-per-share growth. The company's guidance assumes another $200 million in stock buybacks next year, but an additional $500 million to $800 million would lift EPS by three to four cents.
Aetna CEO Ron Williams has also declared an interest in strategic acquisitions. Last year, the Hartford (Conn.)-based company bought the disability business of privately held Broadspire for about $160 million.
While not every cash-rich company is a likely target for shareholder activists, the rise of private equity investors such as Icahn may be helping to support stock prices more generally. "It seems that lots of companies, even those with good fundamentals, are potential targets of such buyers or other companies," notes Ed Yardeni, chief investment strategist at Oak Associates, in a Feb. 20 report. Like the mantra made famous by the film Jerry Maguire, shareholders just want companies to "show me the money."