Look for Companies That Are Rich -- and Generousby
Cash is king. We've heard it before, and we were reminded this morning why cash on the balance sheets of corporate America matters to global investors.
Jonathan Golub, chief U.S. market strategist at RBC Capital Markets LLC provided the insight on Surveillance (6 to 8 a.m. U.S. East Coast time). He brought a chart showing how leverage has declined and cash has risen over the past twenty years. The data reflects net debt-to-equity, and cash as a percentage of assets for the S&P 500 Index, excluding financials.
The chart provides one of the best illustrations we've seen of the dramatic de-leveraging occurring in corporate America. Mr. Golub told us to focus on companies with "fortress-like balance sheets." He argues their leaner cost structure provides additional operating leverage, powering earnings growth of 8 to 9 percent even as the U.S. gross domestic product grows just 3 to 4 percent.
We put Mr. Golub's theory to the test, screening the S&P 500 ex-financials for companies with high levels of cash and those that are distributing that cash via dividends and buybacks.
Twelve companies met our criteria: Analog Devices, Inc. (ADI); Apple Inc. (AAPL); Automatic Data Processing, Inc. (ADP); Caterpillar Inc. (CAT); Ford Motor Company (F); Interpublic Group of Companies, Inc.(IPG); Johnson & Johnson (JNJ); KLA-Tencor Corporation (KLAC); Philis 66 (PSX); QUALCOMM, Inc. (QCOM); Rockwell Automation, Inc. (ROK); Western Union Company (WU).
As for whether Mr. Golub's "Cash is king" strategy is working, this group of 12 companies has returned 10.7 percent this year, compared to 7.8 percent for the S&P 500 Index.