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Investing in Cash Supported Companies

In turbulent times like these, it is important to make sure that the companies you are investing in are financially stable. One way to determine this is by looking at the company’s balance sheet and comparing the amount of debt they have with the amount of cash they have. If a company has a lot of cash and little debt, they will have more opportunities and provide more stability to shareholders than less fortunate companies who have little cash and a lot of debt.

Takeover Target
One such advantage more liquid companies have is that they are more attractive takeover targets. When large companies look for smaller companies to buy, they look at the ones who have little debt and a lot of cash. This is because the larger company does not want to incur a lot of debt because chances are they already have enough of their own. What they are looking for is a cash cow that they can use to help pay off their existing debt.

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One such company that fits this model perfectly is KBR Inc. (KBR). KBR operates as an engineering, construction, and services company that supports energy, civil infrastructure, and government services worldwide. After looking at their balance sheet, you will see that KBR has approximately $1.6 billion in cash and no short or long-term debt. Because KBR was recently spun off from Halliburton, it is not eligible to sell itself until April. Bigger infrastructure companies like Jacobs Engineering (JEC) or Foster Wheeler, Ltd. (FWLT) probably can’t wait. Even if KBR does not get bought out, it is still an attractive investment. KBR is cheap, trading at only 7.5 times earnings compared with peer AECOM (ACM), which trades at about 14 times earnings.

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General Mills
Another advantage to investing in companies with large amounts of cash and little debt are that they usually pay big dividends. Consumer foods giant General Mills (GIS) is one such company. General Mills supplies branded and unbranded food products to the foodservice industry. General Mills has about $655 million in cash on its balance sheet and only $215 million in debt. With a 3% dividend yield, or about $1.72 per share, General Mills is an appealing investment especially since its industry is commonly referred to as “recession proof.”

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Kinder Morgan (KMP)
Another company with a high paying dividend and plenty of cash is Kinder Morgan Energy Partners (KMP). Kinder Morgan Energy Partners owns and operates energy transportation and storage assets in North America. Kinder Morgan Energy has about $355 million in cash on its balance sheet and only $271 million in debt. With their excess cash, KMP is very shareholder friendly distributing a 9.4% dividend yield, or $4.08 per share, to its shareholders. Unlike most energy companies that are at or near their 52-week lows, KMP is right in the middle of its 52-week trading range. Given this company’s pro shareholder view, KMP is a very attractive investment especially in a volatile stock market.

Advantages of Cash and Dividends
During times of uncertainty, investors turn to companies that are financially stable. One key indicator of a company’s financial status is the amount of cash they have compared to the amount of debt they have. These companies are attractive investments because of their takeover potential and dividend payouts. Small, financially stable companies are always attractive to larger companies who are looking to expand or enter new business segments. However, it is not wise to invest in a company as a takeover target if they are not sound financially because the decrease in stock price would most likely negate any takeover premium. Companies that pay large dividends are attractive investments almost anytime, but especially during times of uncertainty. When stock prices are fluctuating like crazy, investors like having the comfort of a company that pays a consistent dividend. Dividends also give the stock prices some protection from falling too low. The lower the stock price, the higher the dividend yield is, which makes these companies that more appealing to investors.

Investors who like to invest in companies paying dividends can synthetically turn non-dividend paying companies into dividend paying companies using covered call investing techniques. A covered call investing strategy can generate monthly income for companies not paying dividends and can “soup-up” the returns generated from dividend paying stocks. Through stock options investors can manage the risk of the stock market, for example put options can be considered “stock insurance“, allowing investors to profit from upward stock movement and providing investors protection in the event the stock makes a downward movement.

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[tags] ACM, AECOM Technology Corp., FWLT, Foster Wheeler Ltd., GIS, General Mills Inc., JEC, Jacobs Engineering Group Inc., KBR, KBR Inc., KMP, Kinder Morgan Energy Partners LP, covered call investing, covered call investment strategy, investment strategy, iron condor, poweroptions, stock insurance, stock option trading, stock options [/tags]

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