EVEN HARDENED WALL Street types can remember the story of the three little pigs. The first little pig built his house with straw, only to see the wolf blow it down. The second pig built his house with sticks and suffered the same fate. The third pig took another approach, building his house with bricks. The big bad wolf huffed and puffed, but he couldn't blow it down.

Memo to investors: The lessons of that fairy tale may come in handy in today's brutal market. In corporate finance, cash may well be the equivalent of bricks, and analysts say that companies generating plenty of it are in the best position to withstand the huffing and puffing of a slowing economy. Indeed, the stockpiling of significant heaps of cash is one of the little noted highlights of this market. According to Thomson Reuters, nonfinancial companies have amassed $543 billion, 38 percent more than they had just five years ago. And there's strong evidence that companies that use their cash wisely will see a long-term payoff in the price of their stock. "Cash flow is the lifeblood of a company," says Mark Mowrey, senior analyst at the Al Frank Fund.

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A healthy flow of cash, for example, has enabled Johnson & Johnson to boost its dividend 46 years in a row. It has also allowed IBM to buy back billions of dollars' worth of its own shares year after year. But experts say it has also given these blue chips and a select group of other firms the ability to invest in their businesses in both good times and bad. A study of nearly 1,000 firms by consultant McKinsey & Co. found that those using cash in hard times for things like acquisitions and advertising, instead of just cutting costs, emerged much stronger from the 1990-91 recession. Indeed, the market valued these aggressive outfits 25 percent higher than their weaker rivals (based on the ratio of the stock price to book value). Strong cash flow, Mowrey says, allows companies to plow their money into "future talent, future technologies and future growth."

But it's also possible to have too much cash. Investors should be wary of companies that build large war chests but do little with them. Cash can burn a hole in some executives' pockets as well, resulting in ill-conceived acquisitions. That's one reason fund managers stick with companies boasting a track record for handling that cash well. To find the best cash foundations, we searched for companies generating plenty of free cash flow the money left after reinvesting in their businesses, paying all the bills and giving shareholders a little something and forecasting earnings growth next year. We threw out companies with shaky balance sheets, then looked for those running their businesses more profitably than they were five years ago. That left us with four picks that even the big bad wolf might find hard to knock down.

Cash in the attic and the basement and everywhere else

Strong cash flow gives these four companies the ability to boost dividends and invest in their businesses: Boeing (BA) IBM (IBM) Johnson & Johnson (JNJ) VF Corp. (VFC)

The headlines haven't been kind to Boeing lately, with the company suffering one black eye after another from repeated delays on its much anticipated 787 Dreamliner jet. Earlier this year the aerospace giant lost a competition for a contract worth up to $40 billion to supply the Air Force with its next fleet of refueling tankers. Throw in worries over the deteriorating health of U.S. airlines and it's no wonder Boeing shares are down more than 30 percent from their 52-week high of nearly $108.

But investors focusing on Boeing's latest troubles might be overlooking some numbers that paint a different picture. The company generated more than $7.8 billion in free cash flow last year, up from $5.8 billion in 2006. Free cash flow has been growing since 2004, thanks to skyrocketing demand from airlines outside the U.S. and Boeing's efforts to make its operations more profitable. Boeing's hefty spending on research and development more than $9.3 billion on commercial aircraft alone in the past three years has also paid off, says JSA Research aerospace analyst Paul Nisbet. The wide-body Dreamliner has already won orders for nearly 900 planes from airlines looking for lighter, more fuel-efficient aircraft, contributing to the company's record order backlog of $346 billion.

Airlines that need planes can wait out the 15-month delay for the Dreamliner or sit around another five years for the promised new A350 from archrival Airbus. Given that choice, analysts say significant Dreamliner cancellations are unlikely. When it comes to large commercial planes, Boeing and Airbus are the only games around. Mani Govil, a portfolio manager at RS Core Equity fund, says that makes them like toll collectors customers have to pay them to get where they're going. Analysts expect the company to increase profits 14 percent this year, to $4.4 billion, or $5.95 a share.

Boeing Treasurer Dave Dohnalek says the Dreamliner delays mean Boeing's free cash flow will likely fall this year before rebounding in 2009, as payments for the planes come in. In the meantime, he says, the company has plenty of financial flexibility, with $12 billion cash on its balance sheet. That money could be used to boost its dividend, buy back stock, pursue acquisitions or deploy cash to its financing operations if airlines need help paying for their planes.

Johnson & Johnson (

There are many ways Johnson & Johnson demonstrates its skill at generating cash and returning a good chunk of it to stockholders. Over the past two decades, the health care conglomerate has increased its free cash flow every year but one. The New Brunswick, N.J.-based firm boosted its dividend 10 percent this year and has bought back $5 billion of its stock since last August.

But collecting gobs of cash isn't enough for companies that want to grow. They also need to know when to spend it and when to hold on to it, and Johnson & Johnson has shown that it knows how to do both. In 2006 the maker of Band-Aid, Tylenol and other products walked away from a deal to buy Guidant when the bidding for the medical-equipment maker hit the nosebleed level of $27 billion. Later that same year, J&J agreed to pay $16.6 billion for Pfizer's consumer business, adding over-the-counter standbys like Sudafed and Listerine to its offerings. That deal, the largest in the company's 121-year history, is "saving the day," offsetting a rough patch in medical devices and pharmaceuticals, says Edward Jones health care analyst Linda Bannister.

Like others in the drug business, Johnson & Johnson faces big challenges on key products. Regulators might limit the use of the company's anti-anemia drugs, and safety concerns have dented sales of its coronary stents. Plus, two of the company's blockbusters, antipsychotic drug Risperdal and migraine medicine Topamax, are about to face generic competition. Free cash flow growth could decelerate in the short term until the company's pipeline delivers new blockbusters, Bannister says. But even then, analysts expect Johnson & Johnson to throw off more cash than most, especially since management is adept at keeping costs low and running the business efficiently.

The stock is up 6 percent since we recommended it in November, but at 15 times next year's projected earnings of $4.45 a share, it trades alongside companies that generate a fraction of the cash and are much less creditworthy. Sasha Kovriga, a comanager at the Osterweis Fund, thinks the market is factoring in all the possible pitfalls but none of the potential upside. "If they just keep delivering results, it will do wonders for the valuation," he says.

Not long ago, VF Corp. was known for stodgy names like Lee and Wrangler jeans, spiced up just a tad by a line of intimate apparel. Today it's the world's largest apparel maker, producing some of the hottest brands in the business, including The North Face outdoor gear, Vans skater shoes and John Varvatos menswear. While consumers cut back and other retailers retrench, Greensboro, N.C.-based VF is on a tear, boosting ad spending and opening stores in the U.S. and abroad.

VF's growth is powered by cash the company generated $707 million in free cash flow last year. That has allowed VF to spend $1.2 billion on acquisitions in the past year alone, and Chief Financial Officer Bob Shearer tells SmartMoney it's still on the prowl. The company wants to round out its contemporary fashion business, which includes high-end-denim brand 7 for All Mankind. VF has sidestepped major pitfalls in the acquisition game by selecting targets that can grow and quickly using its distribution network to wring out costs and free up more cash, says Lazard apparel analyst Todd Slater. For example, VF makes about half its products in its own facilities in South America, giving it control over labor expenses and reducing the time it takes to get to retailers.

The company isn't immune to rising labor and fuel costs and a deeper economic slowdown. But the diversity of VF's brands some of which are found at upscale department stores like Nordstrom and others at discounters like Wal-Mart gives it a cushion, as does its efforts to keep inventories under control so it can avoid costly markdowns. Shareholders get cushions of their own, with the stock selling at a modest 12 times next year's earnings and sporting a 3 percent dividend yield. Dan Genter, chief investment officer of RNC Genter Capital, which started buying the stock in April, says VF is poised for faster growth during the downturn. Analysts expect VF's profits to rise 10 percent in fiscal 2008, to $658 million, or $5.92 a share almost twice the growth forecasted for the industry.

IBM (

Big Blue is swimming in a lot of green these days. International Business Machines churned out $11.5 billion in free cash flow last year and expects that number to increase this year. It's not just the amount of cash that's important to investors but also its steadiness especially in an economic slowdown. About half of IBM's sales come from long-term contracts, and its services business has an order backlog of $118 billion, up $2 billion from a year ago.

The services unit, which does everything from running data centers to helping customers use technology to become more efficient, has stolen market share from competitors like Electronic Data Systems, says Canaccord Adams Senior Technology Analyst Peter Misek. While Hewlett-Packard's recent deal to buy EDS will create a heftier rival for IBM, Misek says it is unlikely to significantly affect the company's standing. The economy specifically, a protracted recession is a larger threat. But so far, so good: About a quarter of IBM's customers come from the hard-hit financial sector, and the company still managed to report solid first-quarter profits. That gave credence to the view that IBM's diversification, which increasingly includes a push into developing markets beyond Brazil, Russia, India and China, keeps it insulated from the economic slowdown.

Nevertheless, IBM is playing it safe, maintaining a healthy cushion of cash, says Jesse Greene, IBM's vice president of financial management (see "The $12 Billion Man," on page 62). That gives management several levers to boost earnings growth, including stock buybacks, such as the $12 billion authorized this year. Analysts expect the Armonk, N.Y.-based company to increase profits 19 percent this year, to $11.7 billion, or $8.52 a share. IBM's stock is up 10 percent since we recommended it in December. But at 15 times earnings, analysts say it trades in line with the market yet offers about twice as much growth. "IBM is a cash machine with tremendous flexibility," says Andy Miedler, senior technology analyst at Edward Jones.

The $12 Billion Man

We check in with the guy in charge of IBM's cash and ask: What does he do with all that money? On a normal business day, Jesse Greene arrives at his first-floor office at IBM around 7:30 and begins his usual routine. Some cordial hellos to employees. A few minutes to scan the business press and check prices on the Bloomberg terminal. And oh, right, there's that $12 billion to get going on. Meet the ultimate moneyman. As vice president of financial management, Greene is the guy in charge of tracking the money Big Blue earns, borrows, lends and invests each day. By his accounting and he'd better be accurate, of course that amounts to a dizzying $3 trillion a year, or an average of about $12 billion a day. And yes, dealing with all that green is a mind-boggling task. The money arrives and departs from more than 170 countries, in everything from euros to yen to just about every other currency you can dream up. (Quick: Which country's currency is the ringgit?) So how does this even-tempered 63-year-old, who doesn't even balance his checkbook all the time (he splits the duties with his wife), manage it all? The short answer is, with a lot of help. Greene heads a team of 55, most of them based in headquarters in Armonk, N.Y., or in Dublin, Ireland. But don't let all those billions fool you: On any given day in Armonk, in a modern three-story building with views of deer and wild turkeys, it's clear just how undramatic dealing with all that money can be. Phones in the "trading room" are rarely used, now that transactions are electronic. Greene's staff sits behind Bloomberg terminals, tracking currency changes, interest rates and other economic data. They're keeping an eye on any risk to IBM and on opportunities to invest. "I never put pressure on my team to get more yield," he says. Indeed, playing it safe has been a mantra of Greene's and a key to his success. An engineer by training, he switched to IBM's finance department in 1989 and says he's always shied away from risky investments. It's just the trait you want in someone who oversees your treasury operations: That conservative approach helped keep Big Blue clear of troubled instruments like auction-rate securities. Still, the biggest shock is how little the company's billions actually can earn these days. Thanks to the credit scare, most companies have retreated to money-market funds, savings accounts and CDs, the very investments ordinary bank customers use. Greene won't give specifics, but the interest rates on all those billions is not likely to be much higher than what your local banker offers you about 2 percent. Greene does have other means to boost the firm's cash flow, such as paying IBM's bills as late as possible. After all, the earlier the cash goes out the door, the less interest it's earning. But that doesn't mean IBM's customers get a break. The company coaxes them to pay up as early as possible. And yes, he's figured it out: That gave him $400 million more to play with last year.