By James Phillipps | 06:01:00 | 16 March 2010
Rising interest rates are typically seen as a major headwind for the markets but with companies sitting on record cash piles, a higher return on their deposits would provide a massive kicker to earnings.
Around four fifths of the companies in the S&P 500 have now reported their fourth quarter results and between them they are holding $932 billion in cash and short-term securities, an increase of nearly of close to a third over 12 months.
Apple is a case in point, sat on nearly $40 billion and no debt. An interest rate rise of just one percentage point would therefore boost its bottom line by close to $400 million. Considering it announced record net profits of $3.3 billion in the fourth quarter, this would equate to a 12% boost to profits and so a 2% rate hike would mean a kicker of close to 25%.
Given that most commentators are saying that it is a question of when the Fed raises rates rather than if, this scenario cannot be considered unlikely. Only the timeframe and the rapidity of the rises are a doubt. Interest rates were last at 2% in the US in April 2008 through to September that year before being slashed to the current level of 0.25% in the December. As recently August 2007 the rate was 5.5%.
Apple is clearly not the only company hoarding cash. Google has over $24 billion, Cisco Systems- $25 billion and Berkshire Hathaway- $26 billion. The likes of Hewlett-Packard, Merck, General Electric, Johnson & Johnson and ExxonMobil also have more than $10 billion apiece in the bank.
Frustratingly for investors, several of these companies, including Apple and Berkshire Hathaway do not pay dividends. Several others, such as Merck, have indicated they are on the acquisition trail, while ExxonMobil already has been on the buying trail. This goes to show that some of these cash piles will not be around for long, but they provide an interesting way to guard against rising interest rates in the meantime.
Among the leading managers invested in Apple are US equity growth stars Patrick Kelly of Alger and Ron Sachs of Janus Capital, who both list it as their largest holding.