Healthy cash flows are a prerequisite for discerning investors looking to add stocks to their portfolio. Hefty cash hoards help companies tide over difficult business cycles, even if they may not always be a big draw in a bull market.
To spot such candidates, we have used certain filters, cash holdings equivalent to nearly 80 percent of equity funds.The other filters are:
3. Debt free
Only three companies--Abbott India, Novartis India and Castrol India—fulfil all three parameters.
Such high cash holding companies can utilize their surplus cash for expanding their business, or reward their shareholders through dividends, bonuses and buybacks.
We drilled deeper to check out how the company spends the cash that it earns through operations. And while cash flows have been strong, the gross block addition in each of the three companies has not changed much. This indicates that the companies are not investing enough back into expanding their business.
However, investors should bear in mind that companies with surplus cash may not necessarily be substantial outperformers, as evident from the chart below.
Two themes that seem common to the 3 companies:-
Conclusion 1 – Investors sought consistent fixed income (dividend) returns every year rather than significant price upsides
Conclusion 2 – Sales were more or less constant year on year for the past 5 fiscals, prima facie indicating that no substantial capacity expansions may have been undertaken, underscored by the flattish trend in the gross block figures as well. This can be mainly attributed to a greater percentage of profits being distributed as dividend. See chart below.Follow @riteshpresswala