Tech is the only sector in S&P 500 where cash exceeds debt
Previously in the series, we discussed that despite its lack of revenue growth, IBM (IBM) has managed to keep profits and cash flows coming in due to effective cost control. IBM belongs to the technology sector, which is endowed with cash-rich companies.
As the above chart shows, the technology sector was the only sector in the S&P 500 that had more cash than debt per share. Low interest rates and increasing pressure from activist investors have led many companies to take on more debt, either to fund their acquisitions or to indulge in share buybacks or dividend payments to keep their shareholders happy.
As the majority of companies in the tech space get their revenues from abroad, their cash reserves are also held abroad. According to DailyFinance, in 2015, Apple (AAPL), Microsoft (MSFT), Cisco Systems (CSCO), and Google (GOOGL) held $345 billion in corporate cash reserves. This makes up a whopping 23% of total corporate cash reserves in the United States.
Cash parked abroad urges tech players to resort to debt market
As the majority of these companies’ cash is parked outside the United States, they resort to bond issuance to borrow for dividends and buybacks. Actavis, AT&T (T), and Microsoft made the largest bond sales in early 2015. Oracle’s (ORCL) bond sale was the fourth-largest deal in 2015. Please read US Corporate Bond Sales Reported Record Deals in 2015 to know more.
You can consider investing in the First Trust NASDAQ Technology Dividend Index Fund (TDIV) to gain exposure to IBM. IBM makes up ~8% of TDIV, but investors who would like application software exposure could consider it, as application software makes up ~15% of TDIV.