FTSE 350 Cash Kings

Income and profits tend to grab the headlines when companies publish their results for good reason. It’s a simple way to assess the health of a business. But as the saying goes, income is vanity, profit is reason, but money is king. Cash-rich businesses normally have more leeway than those that live paycheck to paycheck. This can make it an attractive choice for long term investors.

A pile of money lying around doing nothing is not very useful, however. What matters are the leadership’s plans for their war chest, which are not always entirely clear. There are many ways companies can use their cash: make an acquisition, invest in infrastructure, and return it to shareholders in the form of dividends or share buybacks, to name a few. All of these tend to be positive from an investment perspective.

With that in mind, here’s a look at two companies with huge heaps of cash.

This article is not investment advice or recommendation. Remember that investments can go down as well as up, so you may get back less than what you invested. If you are unsure whether an investment is right for you, seek advice. Past performance is no guarantee for the future.

Investing in sole proprietorships is not good for everyone – it is a higher risk because your investment depends on the fate of that business. If a business goes bankrupt, you risk losing your entire investment. You need to make sure that you understand the companies you invest in, their specific risks, and that all the stocks you own are held as part of a diversified portfolio.

Berkeley Group – building on a solid foundation

Many FTSE home builders are showing healthy cash positions thanks to the boiling real estate market. Berkeley is no exception. The group had net cash of £ 1.1bn at the end of the last full year, although net cash doesn’t necessarily tell the whole story for home builders. Most home builders also buy land on credit, referred to as “land creditors”. This is basically another form of debt and should be taken into account when considering how much money a business has.

In a full year, Berkeley’s land creditors stood at £ 388.2million, bringing the group’s net cash position to just over £ 800million. It’s still a substantial cushion, and along with Berkeley’s other attractions, we think it makes Berkeley appealing.

Berkeley caters to the high-end real estate market with more expensive properties than its peers. This supported the group’s 22 +% operating margins, among the highest in the industry.

Average selling price

Source: 2020 company accounts

Berkeley’s has already started handing out some of its money to shareholders with a £ 451million return on capital program earlier this year. Stocks offer a potential dividend yield of 5.9%, although no dividend is ever guaranteed and returns are not a reliable indicator of future income.

Cash means that the rewards for Berkeley shareholders should not come at the expense of future growth. Management also plans to use the excess capital to fund further growth through land purchases.

With all of this in mind, you might be surprised to learn that Berkeley stocks are trading below their long-term average. This is probably because the last year offered golden loop terms to home builders across the country. With a potential rise in interest rates looming and inflation still a question mark, there are risks ahead.

Relative to some peers, Berkley shares trade on the more expensive end of the spectrum. We believe that this premium is justified given the unique position of the group and the strong underlying activity. But it does mean there could be more downside if the market takes a turn.

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Games Workshop – play well

Games Workshop manufactures and sells fantasy war game figures through its own retail stores, online, and through independent retailers offering Warhammer products. The game enjoys a cult following of loyal fans willing to shell out up to £ 30 per figure, in addition to accessories and paintings. This increase means that gross margins hovered around 70%.

The group’s operating costs have also been relatively moderate, although inflation is expected to push them up over the coming year. Even still, operating margins of over 42% are enviable for any retailer.

A closer look at margins versus the competition

Source: Refinitiv, 11/25/21.

The result is a cash-generating business with no debt and a cash position of £ 85.2million. This model has enabled the group to give shareholders back a potential dividend yield of 2.6% and the potential for special returns when the company finds excess cash on the books. Remember that no dividend is ever guaranteed. Returns are also variable and are not a reliable indicator of future income.

Investors should pay for Games Workshop’s strength, however. Stocks change hands for 23 times expected earnings, well above the long-term average. While this is expensive for a game creator, it’s worth noting that the valuation has dropped significantly over the past three months.

Of course, there is a reason for this. Much of Games Workshop’s value comes from its unique intellectual property. The group helps protect its brands with an iron fist, but the internet age has made that difficult. Recently, fan-created content has come under fire as the company seeks to protect license rights. Part of the group’s strategic plan is to develop its licensing branch with video games, animations and other content. If fans create similar experiences and release them to the world for free, it will undermine this strategy.

Fans were upset and there were boycott whispers on social media. Until the group reports on the current period, it is impossible to say whether the discontent is from a vocal minority or a revolt that is gathering pace. If this is the first case, the decline in valuation that we have seen could offer an opportunity.

A potential boycott is not the only headwind, however. The group is also facing inflationary pressures which will either eat away at its margins or increase the already high price of its products.

Plus, the end of blockages means fans will have less free time, potentially disrupting demand. The risk of a post-containment lull is very real and must be taken into account.

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What investors should remember

The amount of money in a company is just one thing investors should think about before considering purchasing stocks in individual companies. Ratios and numbers should not be considered in isolation, it is important to consider the big picture. It may seem like there are a lot of things to consider when making investment decisions. If you don’t feel like doing all of the heavy lifting yourself, you can use our equity research to help you with your investment decisions.

Unless otherwise stated, estimates, including potential returns, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Returns are variable and not guaranteed. Past performance is no guarantee for the future. The value of investments goes up and down, so investors could suffer a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No opinion is given on the current or future value or price of an investment, and investors should make up their own mind about any proposed investment. This article has not been prepared in accordance with legal requirements to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting pre-research transactions, but HL has controls (including transaction restrictions, physical and information barriers) in place to manage the transactions. potential conflicts of interest presented by such a transaction. Please see our full disclosure of non-independent research for more information.

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Valerie J. Wallis