eResearch | Companies everywhere are hoarding cash as the COVID-19 virus significantly impacts sales and impedes supply chains. As global lockdowns expand, S&P 500 and S&P/TSX indices highlight companies with strong balance sheets and stable cash flows.
Below are the top 10 companies with the highest net cash balances in the S&P 500 Index and the S&P/TSX Composite Index.
TABLE 1: Public Companies with High Net Cash Positions
Balance Sheet Strength
In the U.S., technology companies such as Alphabet, Inc. (NASDAQ: GOOGL), Facebook, Inc. (NASDAQ: FB), and Microsoft Corporation (NASDAQ: MSFT) held the highest amounts of cash, while in Canada, the highest amounts of cash are held by financial services companies such as Great-West Lifeco Inc. (TSX: GWO), Power Corporation of Canada (TSX: POW), and Sun Life Financials Inc. (TSX: SLF).
However, diving deeper into company financials is always prudent to ensure that there are no other liabilities lurking on the Balance Sheet such as Lease Obligations or other Non-Current Liabilities. With the Canadian insurance and financial companies, investments and insurance liabilities can negatively affect liquidity. Offsetting the Insurance & Annuity Liabilities with the Cash and Total Investments significantly reduces Net Cash.
TABLE 2: Canadian Insurance Companies with Insurance & Annuity Liabilities
As the current COVID-19 virus situation provides little visibility on when business will be back to normal, holding a large cash balance reduces several risks as it allows companies to have a source of liquidity when creditors are reluctant to lend cash during economic downturns.
Companies experiencing drastic revenue cuts, with uncertainty in recoveries, will have the most trouble acquiring credit. Therefore, having a safety margin of cash may be the leading factor that decides the survivability of these businesses.
Onex Corporation (TSX: ONEX) is a Canadian private equity investment firm, criticized for holding too much cash as it limited returns to investors. Now it is in a perfect position with C$2.8 billion in cash with zero debt, which will provide a source of cash to invest into opportunities when valuations are low.
Although several large companies have high cash balances due to strong support from equity markets and high margin revenue streams, not every company is like Onex Corporation with zero debt and few financial obligations that could negatively impact a company’s net cash balance.
Companies such as Microsoft, who has the highest cash balance of US$134 billion, only has a net cash balance of US$11 billion due to US$59 billion in current liabilities and US$63 billion in long-term debt.
Cash Flow and CAPEX
It does not matter if a company has a high net cash balance to cover its expenses if future operations are unlikely to continue as expected, which would overall reduce growth rates and forecasted cash flows, ultimately lowering company valuations.
This is true for companies such as Cronos Group and Canopy Growth that have large cash balances but continue to have large CAPEX and negative Cash Flow from Operations. For more information on the Cannabis industry, see our article “Cannabis Companies Count Quarters until the Cash Runs Out”.
Mining company Kirkland Lake Gold has a strong cash position and positive cash flow, and should benefit from higher gold prices that improve margins. Ivanhoe Mines has a strong cash position as it builds out three mines in southern Africa with the first mine set to start production in 2021. For more information about Ivanhoe, see out article “Robert Friedland’s – The Revenge of the Miners – PDAC Presentation”.
Alphabet and Facebook are losing investor confidence as advertisement revenues are expected to be negatively impacted due to the COVID-19 virus, with corporations such as Expedia Group Inc. (NASDAQ: EXPE), one of the largest spenders in the advertisement space, recently announcing a cut on ad-spend by at least 80% to under US$1 billion this year.
When analyzing company cash flows, CAPEX is equally important as growth-stage and tech companies are extremely capital intensive in their daily operations and development, with those expenses continuing relative to increases in sales.
In the U.S., tech companies such as Amazon, Microsoft, and Google have recently entered a “cloud war” involving constant investments into cloud infrastructures such as data centres. According to Canalys Cloud Channels Analysis, in 2019, Microsoft and Google spent US$18 billion and US$6.2 billion, respectively, on cloud infrastructure.
Though several cash heavy companies are looking comfortable on their balance sheets, greater visibility on the impacts of the COVID-19 virus will be apparent once Q1/2020 financials start being disclosed. Company valuations and stock prices should be under pressure as companies release financials with significant impacts from the economic downturn.
//
