Stocks have fallen so far that 2,267 companies around the globe are offering profits to investors for free. That’s eight times as many as at the end of the last bear market, when the shares rose 115 per cent over the next year.
Bank of New York Mellon Corp in New York, Danieli SpA in Buttrio, Italy and Seoul-based Namyang Dairy Products Co hold more cash than the value of their stock and debt as the slowing world economy wiped out $32 trillion in capitalisation this year. Companies in the MSCI World Index trade for an average $1.17 per dollar of net assets, the lowest since at least 1995, and 39 per cent sell at a discount to shareholder equity, data compiled by Bloomberg show.
The cash-rich companies allow investors to pay nothing for future earnings streams, providing opportunities to buyers concerned about deflation, according to Jean-Marie Eveillard, whose $16 billion First Eagle Global Fund has beaten 98 per cent of competitors this year. Microsoft Corp and Novo Nordisk A/S, which generate the most money compared with debt, can expand even if lower consumer demand erodes profits.
“Cash is king, not necessarily for the investor but for corporations,” Eveillard said in an interview from New York last week. His fund holds both Microsoft and Namyang Dairy. “It’s useful to sit on a ton of cash, Number one to survive, as opposed to going bankrupt, and Number two to seize opportunities either to make acquisitions cheaply or to squeeze competitors.”
Stocks plunged this year after almost $1 trillion in bank losses and writedowns froze credit markets and pushed the US, Europe and Japan into the first simultaneous recessions since World War II. The 40 per cent drop in the Standard & Poor’s 500 Index is the steepest since 1931, while the MSCI World’s 45 per cent plummet is the biggest since the gauge started in 1970.
The slump left prices in the global measure at 1.17 times companies’ so-called book value, or assets minus liabilities, on November 20, the lowest on record, data compiled by Bloomberg show.
The MSCI World climbed 2.8 per cent at 8:40 am in London, while S&P 500 futures advanced 2.6 per cent after US President- elect Barack Obama pledged the biggest investment in the nation’s infrastructure since the 1950s to stimulate the economy.
Stagnating growth is heightening the risk of deflation. In the US, consumer prices plunged 1 per cent in October, the biggest drop since records began in 1947. They may slow next year by the most since 1983, squeezing earnings, according to the International Monetary Fund in Washington.
Businesses with reserves will be cushioned from insolvency and may even benefit from deflation because buying power and the value of dividends increase as prices retreat, said Arlene Rockefeller, chief investment officer for global equities at State Street Global Advisors, which oversees $1.7 trillion.
“You want stocks with good cash flow and are self-funding,” Rockefeller said in an interview last week. “This is an opportunity for companies that are large and that do not have a lot of debt to go out and acquire other companies to gain market share.”
The firm’s SSgA Disciplined Equity Fund held shares of BNY Mellon, the world’s largest custodian of financial assets. The bank had $24 billion in so-called negative enterprise value, or the amount of cash that exceeds the value of its shares and debt. The stock climbed 24 per cent since November 20, when the S&P 500 fell to an 11-year low, outpacing the index’s 16 per cent gain.
BNY Mellon is among 49 companies with a market capitalization greater than $1 billion that hold more cash than the value of their stock and debt, out of 2,267 overall, data compiled by Bloomberg show.
Danieli, Italy’s biggest maker of equipment for the steel industry, has $1.49 billion in cash, or almost 40 per cent more than the combined value of its shares and debt after a 73 per cent stock plunge this year, Bloomberg data show.
Just 276 companies had cash that exceeded the value of their stock and debt when the S&P 500 bottomed in 2002. Those shares posted a median total return of 115 per cent over the next 12 months, according to data compiled by Bloomberg. That’s more than triple the return for the S&P 500 during the same span.
Of the 50 largest companies in the Dow Jones Stoxx 600 Index of European companies, Novo Nordisk, the world’s biggest insulin maker, is one of two whose cash exceeds debt by four times.
Novo Nordisk Chief Financial Officer Jesper Brandgaard said on October 30 that the Bagsvaerd, Denmark-based company is earmarking as much as $2 billion for takeovers in the next 12 months as the financial crisis forces biotechnology companies to seek buyers. The company has $1.35 billion and generated $1.83 billion in free cash flow in the first three quarters of 2008.
“The ones that are going to win are those that can generate cash,” Horacio Valeiras, who oversees $11.2 billion as chief investment officer at Nicholas Applegate Capital Management in San Diego, said in a telephone interview last week. His Nicholas Applegate International Growth Fund bought shares of Novo in the third quarter, data compiled by Bloomberg show. The stock has since gained 8.5 per cent, while the Stoxx 600 slumped 26 per cent.
Eveillard at First Eagle increased his fund’s position in Microsoft, the world’s biggest software maker, by 83 per cent to 8.16 million shares last quarter.
The Redmond, Washington-based company is one of only two in the S&P 500 with cash and marketable securities worth more than $20 billion and less than $2 billion in debt, according to data excluding financial firms compiled by Bloomberg. Apple Inc, the Cupertino, California-based maker of iPhones and Macintosh computers, is the other.
Microsoft and Apple outperformed the MSCI World since its low on November 20, posting advances of 13 per cent and 17 per cent, respectively.
Eveillard’s fund is also the biggest overseas shareholder of Namyang Dairy, which has no debt and $270 million in cash. The cash pile is 44 per cent higher than the value of its shares. Reserves at the company, one of South Korea’s biggest dairies, account for 65 per cent of its $418 million in so-called tangible book value, a measure of shareholder equity that excludes assets that can’t be sold in liquidation.
“Cash provides a break against a potential catastrophe,” said Eveillard. “At the end of the day, cash is still worth 100 cents on the dollar.”
That helps explain why investors have rushed to Treasuries this year. Yields on three-month Treasury bills fell to 0.01 percent last week as investors paid a premium for the safest, most liquid assets. The level was the lowest since 1940, according to monthly figures compiled by the Federal Reserve.
