In life and with companies having plenty of cash is a good thing. Sometimes the market rewards the companies because they would tend to have low debts, sometimes the market believes the companies are undervalued because they have not or could be using some of the cash to buy another company. On the stock markets, it depends but in general cash is good.

Emily Halverson-Duncan of Morningstar Research analyzed companies with strong cash flows compared to their peers. In all research, you can easily find more elements to compare in order to make a decision. It is important to find some easy method to determine when something changes, do you like the change or should look for alternatives.

Ms Halverson-Duncan used the following criteria:

free cash flow in the top 1/3 of peers

trailing free cash flow in the top 1/3 of peers    (continues to narrow the field)

dividend payout ration less than or equal to 80% – companies need to retain money to fund growth

5 year annualized sales growth greater than 0

5 year annualized dividend growth greater than 0

5 year annualized earnings per share (EPS) greater than 0

 

Company                   Mkt Cap      Div       FCF     Trailing      Div P/O  5 Yr       5 Yr      5 Yr

($ Bil)          Yield    Yield    FCF/Share  Ratio     Sales gr  EPS gr  Div gr

Alliance Data           13.108        1.0          12.1       45.61          10.7       21.5        17.0       38.5

Lam Research          28.658        2.5            8.5       13.64          25.4       21.8        58.6       46.7

Signet Jewelers          3.439      2.5           33.2       25.65          37.3       14.7        10.2       19.0

Gilead Sciences       92.409      3.2             9.4          8.02          39.7        28.9        29.9       72.5

Principal Fin            15.940      3.7           24.8        14.56          36.6       10.4          9.0        15.2

Discover Fin             25.621      1.9           14.1        14.07          18.1       11.8          4.5        12.9

Broadcom                112.111     2.7              5.5        15.33         40.0       53.6         72.9       87.3

American Fin              9.601     1.3            23.0        23.91          16.8        8.5         13.6       13.1

Reinsurance Group    8.886    1.5             15.4        25.99         17.5         7.3         15.5       13.5

Lear                              12.979    1.4              7.8         15.98         14.4        12.3       33.6       46.9

The other companies in the top 15 were McKesson, United Health, Skyworks Solution, Boeing and Amgen

Linking to dividend paying stocks, any company that has a very good cash flow is an excellent company to whether any downturn and to take advantage when its competition stumbles. The danger is the companies buying into non related industries because they have the cash flow to do so – sometimes it does not work out. The issue is cash is good, but watch what the companies do with it. In addition, with dividend paying stocks one of the prime aspects of buying is to ensure the companies can continue to pay dividends and this is when free cash flow with help you.

There are more questions than answers, till the next time – to raising questions.