You’ve heard the stories of lottery winners that quickly go broke, or a massive celebrity bankruptcy where a pro athlete squanders it all.
The sad reality is money can’t buy smarts or responsibility, and having lots of dough is no guarantee that you will be a “success” down the road.
That’s a lesson investors should take to heart. Some companies currently boast massive cash hoards — notably big tech stocks like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) — but it’s worth asking whether that cash means anything in your analysis of the company as a potential investment.
Cash: What Is It Good For?
Obviously, having cash is better than not having it. There’s some truth in the adage that sometimes you need to spend money to make money. A short list of the ways businesses can spend their resources to grow:
- Building new facilities or improving equipment to meet growing demand or function more efficiently
- Investing in research that pays off in new home-grown products
- Acquiring a valuable company or existing asset (like a patent)
Yet all of these expenses will only pay off if the strategic vision behind them is sound. If it’s not, you have squandered the money — and actually have done more damage than if you never spent a dime in the first place.
Let’s start with the idea of spending to expand operations, perhaps the most obvious way to grow. Starbucks (NASDAQ:SBUX) is a good counterpoint to the idea that “more is more” in all cases. Consider that the company was forced to closed hundreds of shops thanks to overexpansion — then saw fiscal 2008 net income plummet 97% thanks to costly restructuring charges related to undoing that expansion and laying off workers. It not only misspent on growth, but then had to pay to undo the mess.
How about research? Well, it’s only worth it if you work on a good idea. Just compare startup biotechs where one company discovers a viable treatment and the other gets poor marks by the FDA in its clinical trials. The first soars higher … the second goes bankrupt, with nothing to show for all the cash it burned on drug development.
Then there’s the idea of buying out a competitor. Wall Street is full of good and bad examples. Google (NASDAQ:GOOG), which bought Android in 2005 for a mere $50 million, might have made the deal of the century on that one. But the failed buyouts are just as glaring. Take Hewlett-Packard (NYSE:HPQ) and its stupid purchases of Palm and EDS that recently resulted in an $8 billion writedown.
In other words, cash is only as good as what you do with it.
Leadership — Not Cash — Matters
Hopefully, investors know the names of our current cash kings. If not, here’s a short list of the heavyweights and their approximate bank accounts:
- Microsoft: About $62 billion
- Cisco (NASDAQ:CSCO): About $49 billion
- Google: About $42 billion
- Oracle (NASDAQ:ORCL): About $31 billion
- Apple: About $28 billion
- Pfizer (NYSE:PFE): About $24 billion
- Amgen (NASDAQ:AMGN): About $22 billion
- Chevron (NYSE:CVX): About $21 billion
- WellPoint (NYSE:WLP): About $20 billion
- Exxon Mobil (NYSE:XOM): About $18 billion
And for the record, that’s just cash and short-term securities — not longer-term investments or other assets. For instance, Apple has an additional $92 billion in long-term investments on top of this war chest.
But frankly … who cares? If Microsoft can’t figure out what comes next in a post-PC age, it’s cooked. If Pfizer and Amgen fail to develop new drugs, their pharmaceutical pipeline will dry up.
You get the idea.
Perhaps the most compelling is the fact that these cash levels continue to rise — implying that these stocks either don’t see anything worth spending money on, or that they’re afraid to bother in the current macroeconomic environment.
Either way, whether a company has $1 billion or $100 billion is irrelevant if there’s nothing to spend it on. So start thinking of these stocks based on their corporate vision and place in the 21st century global economy … not as rich power brokers with some kind of influence that other stocks don’t have.
What About Dividends?
There are, of course, rare cases when companies actually decide the cash should go back to stockholders rather than just sit in the bank. AOL (NYSE:AOL) announced a massive $1.1 billion dividend and repurchase deal earlier in 2012 … and the stock doubled as a result.
But clearly those kinds of moves are the exception, not the norm, and it’s naïve to think the 10 aforementioned corporations will do something similar anytime soon.
It’s nice to be profitable, and to avoid paying fees and interest on corporate debt to finance growth. It’s also nice to have money socked away in case you want to make a big move later, or to weather short-term troubles such as an economic downturn. But the reality is a huge stockpile of dough in and of itself is pretty meaningless when investors analyze a stock.
Instead, look at a stock’s leadership and potential for growth based on management and innovation. Money is a powerful tool if a stock is pointed in the right direction … but not worth the paper it’s printed on if the corporate vision is flawed.
- Even excluding financial stocks and investment banks, cash stockpiles on Wall Street topped $2 trillion earlier this year. (Business Insider)
- Check out the companies spending the most on R&D via the “Global Innovation 1,000″ report … Toyota (NYSE:TM) tops the list in 2011. (Booz & Company).
- The folly of spending your way to innovativeness. (Forbes)
- And for more proof that money can’t buy success, here are some ridiculously broke lotto winners and ugly celebrity bankruptcies. (Business Insider and InvestorPlace)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple but no other stocks named here. Disclaimer: He has previously discussed cash hoards as a reason to perhaps buy a given stock… but he’s starting to change his tune.