The stock market fell sharply right after the Federal Reserve's announcement of its long-range plans to ease away from the programs it put in place keep the money supply loose and stimulate economic growth. Yet even as investors fear the impact of higher interest rates on the economy, many companies are already prepared with massive amounts of cash on their balance sheets.
For those companies -- and investors in their stock -- higher interest rates could bring better earnings without any extra effort at all.
Keeping Their Cash
U.S. corporations have boosted the cash on their balance sheets to record levels. As of the end of 2012, companies outside the banking and financial sector held $1.45 trillion in cash, according to Moody's -- $130 billion more than at the end of 2011. Moreover, 58 percent of that money -- a whopping $840 billion -- is held outside the U.S., kept there so the companies can avoid paying U.S. taxes on it.
With interest rates recently at rock-bottom levels, companies haven't been able to earn much income from their cash hoards. But rising rates could help them in that regard, boosting their total investment income and potentially even having a detectable impact on their bottom lines.
Let's take a closer look at some companies with exceedingly large cash stashes and see why they should be rooting for the Fed to move faster in getting interest rates back to more normal levels.
5 Companies That Will Benefit From Higher Rates
5 Companies That Will Benefit From Higher Interest Rates
Apple (AAPL) is the most commonly cited hoarder out there, with more than $144 billion in cash and investments as of March 31. With the cooperation of telecom companies that offer its iPhones and iPads at subsidized rates, paying Apple the difference in exchange for the right to collect higher monthly service-plan revenues, the tech giant has been able to start paying a lucrative dividend to investors while continuing to build its cash position.
Given that Apple's net income over the past 12 months was nearly $40 billion, the amount of interest the company might be able to generate on its cash position might seem trivial. But for every percentage point increase in interest rates, Apple has the potential to add $1.44 billion annually to its bottom line -- or roughly $1.50 per share. In a normal interest rate environment, those billions could add up.
As of March 31, Microsoft (MSFT) held $73.8 billion in cash and short-term investments. The software giant continues to reap billions from its cash-cow core products, such as its Windows operating system and its Office suite of business software.
A rise of just 1 percentage point in interest rates on that cash could contribute almost $740 million in earnings to Microsoft each year. That would represent between 4 and 5 percent of Microsoft's current total net income. The company has seen earnings declines in recent years, so that providing some upward momentum would help investors regain confidence in the company going forward.
Google (GOOG) has more than $50 billion in cash and investments, most of which it earned from advertising revenue from its online search engine. The mobile industry has become increasingly important for the company, but mobile revenue still represents only a tiny portion of Google's overall sales.
For Google, the half a billion dollars that a single percentage-point increase in interest rates could add to its bottom line would push its overall earnings up around 4 to 5 percent -- similar to the impact that would have at Microsoft. That might prove to be enough to lift the much-followed stock above $1,000 a share once and for all.
Pfizer (PFE) has plenty of money on its balance sheet, with about $35 billion in cash and short-term investments. Unlike most of the tech companies on the list, though, Pfizer, has extensive debt on its balance sheet as well, with more than $40 billion in short-term loans and long-term debt. That makes it more important for Pfizer to make the most from its cash in order to offset its interest expense.
Pfizer's earnings dwarf the potential benefit of an extra $350 million in annual income from a 1-percentage-point rise in rates. But with the company in need of help from new pipeline drugs to offset the loss of some former blockbusters that no longer have patent protection, Pfizer could use that extra cash to fund further research and development to find potential new pharmaceutical best-sellers.
Business software giant Oracle (ORCL) isn't a household name, but it rakes in plenty of cash at the corporate level. Its $33.4 billion in cash and short-term investments would create additional income of about a third of a billion dollars annually from a single percentage-point increase in rates, boosting earnings by about 3 percent.
Oracle has had considerable success combining recent innovations like cloud computing with its traditional line of database software and server hardware. In its quest to become a one-stop shop for companies seeking broad-based IT services, Oracle has been smart about deploying cash to boost its business prospects worldwide even in the face of heightened competition throughout the industry.
Even as rising interest rates begin to drag on economic growth, these companies and others with high cash balances will gain even more flexibility to make new investments and seek faster growth. For investors wanting profitable stocks in their portfolio, that's a key ingredient for long-term success.
Motley Fool contributor Dan Caplinger owns shares of Apple. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, Microsoft, and Oracle. Try any of our newsletter services free for 30 days.