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The Only Way I Know to Get High Income from Safe InvestmentsBy
Tuesday, March 23, 2010
We call them "cash boxes."
Cash boxes are publicly traded companies that hold enormous quantities of cash. They may have sold an asset, won a lawsuit, or issued new shares or bonds. Whatever the reason, they hold huge cash balances out of proportion to the size of their businesses.
Take one company I found last year. It was a homebuilder with an insurance business on the side. It sold its homebuilding business in 2007 for $890 million and hasn't found anything better to do with the cash. Now it's just a small insurance business with a huge pile of cash. Cash represents 88% of this company's total assets. The company has invested half this cash in short-term government bonds and the rest is on deposit in government-insured bank deposits.
I found another cash box recently. It had only sold 40% of its stock to the public. In 2007, it sold the remaining 60% for $3.4 billion. Management hasn't found a way to spend this cash yet, so it's just sitting on the balance sheet waiting for a rainy day. Shares trade at $15.50 each... and the company has no debt and $10.71 per share in cash on the balance sheet.
I recently received this e-mail from a subscriber to my 12% Letter:
This is a great question... With official interest rates at zero and with investments, generally, offering the lowest returns they've offered in America's history... the answer has never been more important.
Cash boxes are my solution.
First, huge cash balances turn "cash box companies" into safe havens. With all the cash, they can't go broke or even suffer from any external events. While an epic banking crisis locked down the entire financial system and sent hundreds of firms to the wall, the stock prices of the two companies above didn't exhibit any turbulence at all.
Second, their huge cash balances allow cash boxes to pay dividends and buy back shares. This is why cash boxes make such good income investments. (Not all cash boxes I've looked at pay dividends, but many of them do... and they tend to be larger than average. One of the cash boxes I mentioned above pays an 8% dividend. The other pays a 4% dividend.)
Third, the cash presents these companies with investment opportunity. With the markets rallying for over a year in one of the greatest stock market bounces in history, there aren't many cheap investments right now. But that could change quickly if the market starts falling again. If that happens, these companies will be "Johnny on the spot" with their cash, waiting to make cheap acquisitions and enhance shareholder value.
Of course, this third outcome is pure "gravy" for the income investor who is quite content collecting large dividends from the most stable stocks in the universe.
So how do you find these high-yielding cash boxes? There's no easy way, unfortunately. Stock price is one method I use. I filter the stock market for stocks that didn't fall in price in 2008. Only stocks with high cash balances and low debt levels were able to buck the bear-market trend.
Enterprise value is another indicator I use. Enterprise value is the amount of total capital a company has invested in its business. Accountants calculate it by taking the market cap, adding debt, and subtracting cash. I filter the market for companies that have negative enterprise values. A negative enterprise value always indicates a huge cash balance.
It's never been harder to generate income from safe investments. In fact, it's almost impossible. Cash boxes are the best option today.
Good investing,
Tom
P.S. My 12% Letter readers love these "cash box" income investments, and I have searched all corners of the market to find them for my subscribers. I now have nine of them in my portfolio... paying 4% dividends on average.
In my latest issue, I recommended what may be the best one yet. It's raised its dividend every year for the past 16 years... and sells its shares direct to the public. For details on how to access my report with a risk-free subscription, click here.
Further Reading:
Earlier this month, Tom showed readers how to "supercharge" their income investments. "Pretty soon," Tom explains, "your money is growing like a bacteria colony." Get the details here: This Cheat Sheet Contains the Best 212 Dividend Stocks in America.
DailyWealth Classic: A couple years back, Tom broke down the four qualities that make an income investment great. You need a simple business, an advantage over the competition, low tax rates... and a fourth element you probably never considered. Find the full story (along with one company that embodies all four qualities) here: The Perfect Income Investment.
Market NotesA PICTURE OF THE BASICS APPROACH AT WORK New investors often go through a three-step "lifecycle" in their stock selection methods. One, buy some fad shoe retailer or the company that makes the next great medical gadget. Two, lose money. Three, eventually come to this line of thinking...
"Forget 'new stuff,' I just want some Warren Buffett investments... boring companies that make soda, disposable razors, and band aids. Let me compound my money safely instead of losing on the next fad."
Last week, Tom Dyson outlined the incredible compounding power of cigarette maker Altria. Rather than try to guess the next consumer fad, Altria just sells millions of cigarettes every single day... just like Coca-Cola sells Coke... and Johnson & Johnson sells Band Aids.
Another example of the boring basics at work: Today's chart of America's largest funeral-home chain, Service Corp (SCI). No "next new thing" here... just a basic service everyone must deal with. SCI just reached a new high and sports one of the smoothest uptrends in the market. We're not saying buy the stock... We're simply pointing out that the "basics" approach works wonders. Everyone learns this principle eventually.
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