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thoughts on companies with a lot of cash?

is it appropriate for them to hold cash the way we hold cash for a rainy day?

in terms of specifics: net cash/debt to market cap

is a 20% net cash appropriate?

I love my cheese. I got to have my cheddar.

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Sounds bad to me.  Should use it above the cost of capital or distribute to shareholders. 

Nerdyblop wrote:

is a 20% net cash appropriate?

I’m sure it varies from industry to industry, but my intuition ventures to think that too much cash for any extended period of time is more often a bad sign than good. 

"Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom." -Viktor Frankl

what would you prefer them to do with net cash? invest in bonds? distribute by shareholder buybacks? dividends? M&A (dear god no), spend on research like google. take apple for instance. a cash generating machine. literally 50b in fcf per year.

it actually got me thinking about pensions. like pensions would be a way for these tech cos to invest their extra money on the S&P 500 or other stocks etc. the gains from their contributions would effectively be their come up not their employees, and its a lot better than buying ****ty bonds. 

I love my cheese. I got to have my cheddar.

Nerdyblop wrote:

what would you prefer them to do with net cash? invest in bonds? distribute by shareholder buybacks? dividends? M&A (dear god no), spend on research like google. take apple for instance. a cash generating machine. literally 50b in fcf per year.

it actually got me thinking about pensions. like pensions would be a way for these tech cos to invest their extra money on the S&P 500 or other stocks etc. the gains from their contributions would effectively be their come up not their employees, and its a lot better than buying ****ty bonds. 

I mean I really think context is everything when thinking about what a co’s cash management strategy should be. Clearly if they have the innovation-centric culture that you see in Amazon, Google, etc., you’d be remiss as a shareholder if you didn’t want them to explore new projects/opportunities in the industries they are watching. I mean, at the end of the day, isn’t that what makes them the momentum type of names in equity markets? 

I know that sometimes in companies like Apple, where you literally have more money than you know what to do with, that it becomes a really challenging exercise. 

I do think though that if all you can think of doing with your excess cash is to buy listed financial securities then that might be more impetus for returning cash to shareholders by way of buybacks/dividends and let them invest the proceeds as they please. 

"Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom." -Viktor Frankl

good point. but:

say your stock is expensive, would it then be a good idea to buyback?

say dividend tax rates were high, would it then be a good idea to give out dividends?

say employee wages are high, would it be a good idea to spend on research?

say interest rates are low, would it be a good idea to invest in bonds?

so if all alternatives were ****, hoarding cash then?

i guess all things considered, a person could buyback their own shares, people can just sell them as you push up the price. so it doesnt matter if you overpay for your own **** i mean stock….

I love my cheese. I got to have my cheddar.

Dividend and share repurchase are the same but repurchase is better for taxes. If the shareholders thinks the stock is expensive, they can sell the amount of the buyback for cash. I don’t invest in a company to buy bonds I could also buy, unless it’s important for the business like banking or insurance. 

depends on the company.

cyclical businesses: cash accumulation in boom times is good as it limits the odds of a capital raise at the worst possible time when the bust times inevitably arrive.

tech companies: r&d is overrated unless it is related to a marketable product. r&d for the sake of r&d is wasteful. i can imagine many large tech firms overspend on r&d looking for some bizarre moonshot. but this is also a natural part of r&d as you want to give your employees some freedom to explore ideas within the company rather than outside on their own.

staples and utilities: should never have cash and should be highly levered to withdraw as much return out of their stable returns as possible but also maintain an emergency credit facility should you have a bad year or two for some reason.

mining, oil and gas: good to have lots of cash as the industry is often short of cash and having cash when everyone in the industry needs it is how you win.

retailers: lots of cash is good. no retailer is safe from a bad quarter, year, etc.

also, people should never hold large sums of cash. this golden rule is basically from 100 years ago when credit didn’t exist. unless you are a cyclical person (like a manufacturing or kitchen line worker) and expect multiple periods of several years of complete unemployment, holding lots of cash will limit your lifetime wealth accumulation by several hundred or possibly even millions of dollars. most people are like a utility and should lever up but keep emergency credit available for the small chance of a rough patch.

Matt Likes Analysis wrote:

depends on the company.

cyclical businesses: cash accumulation in boom times is good as it limits the odds of a capital raise at the worst possible time when the bust times inevitably arrive.

tech companies: r&d is overrated unless it is related to a marketable product. r&d for the sake of r&d is wasteful. i can imagine many large tech firms overspend on r&d looking for some bizarre moonshot. but this is also a natural part of r&d as you want to give your employees some freedom to explore ideas within the company rather than outside on their own.

staples and utilities: should never have cash and should be highly levered to withdraw as much return out of their stable returns as possible but also maintain an emergency credit facility should you have a bad year or two for some reason.

mining, oil and gas: good to have lots of cash as the industry is often short of cash and having cash when everyone in the industry needs it is how you win.

retailers: lots of cash is good. no retailer is safe from a bad quarter, year, etc.

also, people should never hold large sums of cash. this golden rule is basically from 100 years ago when credit didn’t exist. unless you are a cyclical person (like a manufacturing or kitchen line worker) and expect multiple periods of several years of complete unemployment, holding lots of cash will limit your lifetime wealth accumulation by several hundred or possibly even millions of dollars. most people are like a utility and should lever up but keep emergency credit available for the small chance of a rough patch.

+1 for this summary 

"Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom." -Viktor Frankl

well Microsoft has $132 billion in cash and STI….Apple has $67 billion in cash and STI….they seem to be doing alright both earnings wise and stock price wise.

Be yourself. The world worships the original.

Regarding the big tech companies, a lot of times most of the cash is held by foreign subsidiaries and they don’t have much flexibility to do anything with the cash, unless they take a large tax hit on repatriating it. Apple has actually hit the debt markets quite a bit in the last few years while at the same time accumulating a lot of internally generated “free cash flow”. This all makes you question what true free cash flow actually is b/c a good portion of the “cash” generated isn’t really all that liquid. Most of Apple’s share repurchases have been funded by debt in recent years.

I don’t think the markets view subjecting this excess cash to US taxes that favorably. eBay did it a few years ago and it was not well-received, if I remember correctly.

I agree. A lot of those cash balances are not exactly cash. I bet the holdings would decrease if they were able to bring it domestically. 

rawraw wrote:

I agree. A lot of those cash balances are not exactly cash. I bet the holdings would decrease if they were able to bring it domestically. 

170 billion of 237 billion “cash” were in long term marketable securities.  Majority of $170 billion of LTMS were level 2 corporate securities and MBS.

Be yourself. The world worships the original.

infinitybenzo wrote:

rawraw wrote:

I agree. A lot of those cash balances are not exactly cash. I bet the holdings would decrease if they were able to bring it domestically. 

170 billion of 237 billion “cash” were in long term marketable securities.  Majority of $170 billion of LTMS were level 2 corporate securities and MBS.

Are you trolling or purposefully ignoring the context of comments?  Or are you making a point I am missing?

nah youre making it too complicated. I am simply in agreement with you - just threw out couple numbers

Be yourself. The world worships the original.