Cash Grab in Progress

01/24/2011 4:38 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Call it the No-Downside Rally. Fat balance sheets are soothing investors and moving shares of long-neglected large caps, says senior editor Igor Greenwald.

There's a theme emerging that could power the US stock market significantly higher before the next significant correction comes around.

It's writ large in today's rise, which follows last week's 1% dip from a two-year high by the Standard & Poor's 500 average.

In brief, the question of the day (and month, and year) is: What's my downside? Those paying up for stocks today are using dividends as one gauge—and getting an answer to their liking.

Look at the action in Intel (Nasdaq: INTC), dead money for most of last year under the assumption that, with tablets ascendant, the chip maker's PC glory days are gone for good.

But there's dead, and then there's yielding 3.4% with a new $10 billion share buyback and priced at less than five times trailing cash flow, which is what Intel became this morning after its well-telegraphed dividend hike.

Berkshire-Hathaway's (NYSE: BRK.B) stock has been similarly comatose, until Barron's put Chairman Warren Buffett on the cover as "Mr. Moneybags" gushing cash, predicting that the insurer could pay a modest dividend out of its growing cash pile.

General Electric (NYSE: GE), which has hiked its dividend twice in the last year, is adding to Friday's 7% advance, marching above $20 for the first time since October 2008. Dividend ETFs like the iShares Dow Jones Select Dividend Index (NYSEArca: DVY) and the PowerShares Hi-Yield Equity Dividend Achievers (NYSEArca: PEY) are outperforming the broader market.

Cash on the corporate balance sheets serves as a safety net for the share buyers paying progressively higher prices. The market leaders today are Intel, Apple (Nasdaq: AAPL), IBM (NYSE: IBM), Microsoft (Nasdaq: MSFT) and Cisco Systems (Nasdaq: CSCO), which are sitting on a combined $140 billion in cash or equivalents.

In Apple's case, shareholders aren't getting any cash back via dividends just yet. But as the recent quarterly report confirmed, the earnings yield is tremendous. Netting out the company's cash, the stock sells for 14 times estimates for the fiscal year ending in September, estimates that are highly likely to be blown out to the water by Apple. Combine that with 70% revenue growth, and ask yourself about the downside.

The question's also worth asking about the NFJ Dividend, Interest & Premium Strategy (NYSE: NFJ) closed end fund, which is yielding above 10% after tripling its quarterly payout last month. Its shares are up all of 3 cents today and still sell at a discount to net asset value. The fund writes calls and collects interest on convertibles to augment its blue-chip dividend stream. The downside is ... what?

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