Cash is King Techs

10/21/2013 7:00 am EST


Companies that are sitting on a lot of cash provide a big margin of safety against a market decline, asserts Michael Robinson; in Money Morning, he highlights three "Cash is King" tech stocks.

Cash-rich tech leaders can use that money to do three things that will only benefit you as a shareholder.

The company can pay dividends or increase the payout ratio; it can buy back shares, a move that can push the stock higher on its own; and it can buy other firms in a way that can improve future growth and help the company expand into new markets.

With strong cash flow as our guide, let's take a look at these tech firms that have a huge amount of cash on hand already—and are most likely to add to their war chest with the hefty cash flows they generate.

Cisco Systems (CSCO) is a big-cap tech leader that throws off a tremendous amount of cash. Then again, it's a leader in the web-based technology that is integral to today's tech-centric world.

The company sells the routers, switches, servers, optical components, and wireless controllers used to access the web and manage its content.

As a result, Cisco is targeting the high-growth market for the "Internet of Everything" (IoE). Simply stated, the Internet of Everything means that nearly every single object in the world will be connected via wireless chips and sensors to a vast computer network.

Cisco generates about $8.6 billion in free cash flow (FCF) a year. It's now sitting on net cash of $34 billion, or about $6.30 a share. With a share price of $24.30, that gives us a true cost of about $18—and a 25% safety margin.

Another cash-rich heavyweight is Microsoft Corp. (MSFT), which recently said it's buying Nokia's devices and services business for $5.2 billion plus $2.2 billion in licensing fees.

The idea is simple; Microsoft is way behind in the mobile tech sector and needs to make a bold move to become a serious player.

And now that CEO Steve Ballmer has announced his retirement, the software giant is about to embark on a turnaround plan. I expect that to include more acquisitions into areas with much greater growth than the stagnant PC market.

Microsoft has strong financials and a fortress balance sheet. Microsoft brings in $19 billion a year in free cash flow. At the end of June, it had nearly $60 billion in net cash and equivalents on its balance sheet.

With a market cap of $273 billion, Microsoft trades at about $32.65. But it has net cash per share of $7.23. That lowers our true cost of buying the stock to $25.42—creating a 20% margin of safety.

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