6 Reasons Why Cash Reserves Are Good for a Company’s Stock

If their executives know how to spend wisely, cash-rich companies can be money-making stocks for investors.

Is cash king, or is cash trash? If you’re an investor, the question has never been so pertinent or pervasive. Dozens of major corporations reacted to the recession the same way consumers did: They started paying off debts and building up cash reserves. The industrial companies in Standard & Poor’s 500-stock index are now sitting on a record stockpile, estimated at $959 billion, according to S&P.

This situation presents tremendous opportunities but also enormous challenges. Experts say that investors’ fortunes could be made or broken depending on how the companies handle their cash. “You have to look at each company individually and figure out what they’re going to do with their treasure trove,” says Mark Boyar, principal at Boyar’s Intrinsic Value Research, in New York City. “Some companies will squander the money. Others will use it to significantly improve their performance.”

In today’s low-interest-rate environment, cash can be a negative for companies -- and by extension, their investors -- because it doesn’t generate much income. But gigantic cash hoards have also become important for several reasons. Here are six positive ways companies can deploy their cash reserves.

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They can pay or boost dividends.

Intel boosted its dividend 15% in January; Whirlpool recently increased its payout 16%; Cisco Systems initiated its first dividend in March.

They can buy back shares.

Intel is spending $10 billion; Hewlett-Packard is doing the same; Bristol-Myers Squibb is buying back $3 billion in stock; Northrop Grumman is buying back about $2 billion in stock; and The Washington Post Co. is authorized to buy back as many as 750,000 shares.

They can buy other companies.

Microsoft is buying Skype for $8.5 billion; Johnson & Johnson has agreed to buy Synthes for $21.3 billion; and SanDisk is buying Pliant Technology for $327 million.

They can pay down debt.

Bristol-Myers has retired $750 million in debt; Whirlpool paid into its pension to reduce future funding needs.

They can invest internally.

Whirlpool says its priority is to make capital expenditures focused on product innovation; Google has a long history of developing new products and services, from its translator to the Chrome Web browser and Android operating system.

They can save for a rainy day.

Apple and Google are sitting on cash for future initiatives.

See STOCK WATCH: Cash-Rich Stocks to Buy Now for investment ideas.

Kathy Kristof
Contributing Editor, Kiplinger's Personal Finance
Kristof, editor of SideHusl.com, is an award-winning financial journalist, who writes regularly for Kiplinger's Personal Finance and CBS MoneyWatch. She's the author of Investing 101, Taming the Tuition Tiger and Kathy Kristof's Complete Book of Dollars and Sense. But perhaps her biggest claim to fame is that she was once a Jeopardy question: Kathy Kristof replaced what famous personal finance columnist, who died in 1991? Answer: Sylvia Porter.