Free cash flow yield can be an underutilized metric for value investors. Ratios like the PE ratio and price/book can be more popular among investors, but both have significant drawbacks, especially in a world driven by companies with high intangible assets. Free cash flow yield can help address these problems and was able to more accurately value many of the big tech companies when the other metrics painted a less accurate picture.
Before diving into free cash flow yield, it’s important to understand what free cash flow (FCF) is. Free cash flow represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It’s calculated by subtracting capital expenditures from operating cash flow.
Free cash flow is crucial because it shows how much money a company has left over to pay dividends, buy back stock, pay down debt, or reinvest in the business. Unlike earnings, which can be manipulated through accounting practices, free cash flow is harder to artificially inflate and provides a clearer picture of a company’s financial health.
Defining Free Cash Flow Yield
Free cash flow yield is a financial ratio that compares a company’s free cash flow per share to its market price per share. It’s calculated by dividing free cash flow per share by the current share price.
FCF Yield = Free Cash Flow per Share / Current Share Price
This metric is expressed as a percentage and essentially shows how much cash a company generates relative to its stock price.
Why Free Cash Flow Yield Matters to Investors
Free cash flow yield is an important metric for several reasons:
- Valuation tool: It helps investors assess whether a stock is potentially undervalued. A high FCF yield may indicate that a stock is undervalued relative to the cash it’s generating.
- Company health indicator: It shows how efficiently a company can generate cash relative to its market value, which can be a sign of financial strength.
- Comparison metric: FCF yield allows for easier comparison between companies of different sizes or across different sectors.
- Dividend and buyback potential: A high FCF yield can indicate a company’s capacity to increase dividends or share buybacks, which can benefit shareholders.
- Acquisition target potential: Companies with high FCF yields might be attractive acquisition targets, as they generate significant cash relative to their market value.
5 Stocks with High Free Cash Flow Yields Passing Validea’s Models
Let’s examine five stocks that currently boast high free cash flow yields and score well according to Validea’s guru-inspired models.
Amalgamated Bank is a mission-driven, full-service commercial bank that provides a complete suite of financial services to both commercial and retail customers.
AMAL has a strong free cash flow yield of 11.2%. The stock scores particularly well on Validea’s Twin Momentum Investor model, based on the strategy of Dashan Huang, with a perfect 100% score. This model looks for stocks with strong fundamental and price momentum. AMAL’s fundamental momentum and price momentum both rank in the top percentiles of Validea’s database.
The stock also scores highly (93%) on the P/E Growth Investor model, inspired by Peter Lynch’s strategy. This model favors stocks with favorable P/E to growth ratios, and AMAL’s PEG ratio of 0.44 is considered very attractive.
2. American Express Company (AXP)
American Express is a globally integrated payments company known for its credit card, charge card, and traveler’s cheque businesses.
AXP has a solid free cash flow yield of 8.1%. The stock receives a perfect 100% score from the Multi-Factor Investor model, based on Pim van Vliet’s strategy. This model seeks low volatility stocks with strong shareholder yields and momentum. AXP’s low volatility, combined with its strong net payout yield and momentum, make it a top pick for this strategy.
AXP also scores 94% on the Twin Momentum Investor model, indicating strong fundamental and price momentum.
Carter’s is a major American designer and marketer of children’s apparel.
CRI boasts an impressive free cash flow yield of 14.0%. The stock receives a perfect 100% score from the Earnings Revision Investor model, inspired by Wayne Thorp’s strategy. This model looks for companies with positive earnings estimate revisions, and CRI has seen upward revisions for both its current year and next fiscal year estimates.
CRI also scores highly (91%) on the P/E Growth Investor model, with its PEG ratio of 0.69 considered very favorable.
HF Sinclair is an independent energy company that produces and markets light products such as gasoline, diesel fuel, jet fuel, renewable diesel, and other specialty products.
DINO has a strong free cash flow yield of 18.7%. The stock receives a perfect 100% score from the Value Composite Investor model, based on James O’Shaughnessy’s strategy. This model looks for stocks that rank well across multiple value factors, and DINO’s combination of value metrics puts it in the top percentile of Validea’s database.
DINO also scores highly (94%) on the Acquirer’s Multiple Investor model, inspired by Tobias Carlisle’s approach. This model seeks undervalued companies based on their operating earnings relative to enterprise value.
Skechers is a global leader in the performance and lifestyle footwear industry.
SKX has a solid free cash flow yield of 8.8%. The stock scores 94% on the Twin Momentum Investor model, indicating strong fundamental and price momentum. SKX’s combination of fundamental and price momentum ranks it in the top 5% of Validea’s database.
SKX also scores highly (93%) on the P/E Growth Investor model. Its PEG ratio of 0.44, based on its P/E of 17.77 and historical EPS growth rate of 40.7%, is considered very favorable by this model.
Free cash flow yield is a valuable metric for investors seeking undervalued companies with strong cash-generating abilities. The five stocks highlighted here not only boast high free cash flow yields but also score well across various investment strategies tracked by Validea.
Further Research
