Cash Is King Again

By Brad Thomas, Editor, Wide Moat Daily

Last week began with multiple positive disclosures – the biggest one being that the consumer price index rose only 0.1% in May instead of the 0.2% analysts expected.

We also learned that average hourly earnings increased 1.5% from January through May compared with inflation’s 0.7% bump. And the Bureau of Labor Statistics revealed that the vast majority of new U.S. jobs are going to Americans.

That’s a big deal considering how, under Biden, illegal immigrants were getting most of the positions being reported.

All that information helped stocks gain ground last week despite political and societal upheaval across the U.S… right up until Israel attacked Iran on Friday. Then, just like that, all bets were off.

I’m not here to debate geopolitics today. Israel has its reasons for the strikes. Trump has his reasons for pursuing peace instead.

But the fact is that one way or the other, the globally interconnected markets just became less predictable. And stocks are feeling pressure as a result once again.

It just seems to be a year for volatility so far, with more to come.

That’s why I’m looking for companies that can thrive through all the chaos. Companies that have the resources to not only maintain their own operations but actually grow them when everyone else’s chips are down.

In order to do that, they have to keep cash on the side. Either that or maintain the ability to get cash quickly and safely.

This is called the “cash is king” rule, and it’s one that rarely lets me down.

Cash: The Ultimate Kingmaker

The term “cash is king” stems from the Black Monday crash on October 19, 1987. The Dow Jones Index fell 22.6% in a single trading session. It was, and remains, the single worst one-day down move in percentage terms for the index.

About $500 billion in market capitalization was erased from U.S. markets. It was close to $2 trillion globally. And investors were left in a state of shock, unsure what to do with the money they had left.

That’s when Pehr G. Gyllenhammar, the CEO of Volvo at the time, pointed out the value of cash. He believed that having some on the side is more valuable than any other asset.

This is contrary to what most investors believe. They understand (correctly) that cash holdings will be eroded over time thanks to inflation. But cash also provides a benefit – liquidity and optionality. And thanks to the approximate 4.5% on offer with short-term Treasurys and money market funds, investors should still keep pace with inflation while eking out a modest return on their cash position.

There are also benefits for public companies…

Basically, companies that save up for a rainy day are better prepared for, well, rainy days. Not only do they stay safe and dry the whole storm through, but they’re also able to extend their umbrellas by buying up businesses that didn’t properly prepare.

A well-known example is Warren Buffett and Berkshire Hathaway during the 2008 crisis. At the time, Berkshire had $45 billion in dry powder. And when the market panicked, Buffett went shopping. The most famous example is probably Buffett’s $5 billion investment in preferred shares from Goldman Sachs (GS), which paid a 10% annual dividend.

Realty Income (O) is another cash-is-king business. As a real estate investment trust, or REIT, it’s legally designed to be conservative.

As I’ve explained in previous articles, REITs must dole out at least 90% of their annual taxable income to investors. That makes their dividends safe and steady as a general rule.

Realty Income is one of the best in this regard. The company has raised its dividend every single year for 30 years now – with every intention of growing that record for decades to come.

At first glance, that might not seem like a business drowning in liquidity. After all, if you have to pay out 90% of your taxable income to investors, how much is really left over the business?

The answer, as always, is nuanced…

Realty Income on Display

Realty Income, which was founded in 1969, owns 15,600 commercial properties located throughout the U.S. – all 50 states – plus the U.K., Ireland, Germany, France, Spain, Italy, and Portugal.

The company has been aggressive in expanding over the past several years, even with all the chaos this decade has seen. For instance, it bought up fellow REIT Vereit for about $11 billion in 2021. And then last year, it acquired another competitor, Spirit Realty Capital, for $9.3 billion.

This is in addition to dozens of smaller purchases along the way. Last year was also when Realty made a €527 million sale-leaseback purchase of 82 retail properties throughout five European countries.

Realty Income can do all this because it still has $3.133 billion in liquidity. That’s a sizable amount for a REIT that has to pay out so much to its shareholders. Moreover, a month and a half ago, it recast its credit facility to an aggregate $5.38 billion in multicurrency unsecured facilities.

It’s also important to point out that Realty Income is highly regarded by creditors. So, what it can’t pay out directly, it can easily borrow.

In short, it is more than capable of seizing opportunities, even during downturns and chaotic conditions.

Better yet, Realty’s shares themselves are cheap despite their steady growth. REITs in general haven’t been doing so well under the elevated interest rate environment. That’s why Realty is trading at 13.7 times price to adjusted funds from operations compared with its normal 18 times.

As I’ve said before and I’m sure I’ll say again, I’m confident in America’s economic future. So this current chaos?

It’s temporary. Mark my words.

But since it’s here for now… and since some other short-term chaos will no doubt rise again before long…

I’m making sure to hold stocks that offer value no matter what. To me, Realty Income checks that box.

Regards,

Brad Thomas
Editor, Wide Moat Daily