Free cash flow (FCF) is the cash that a company generates from its operations after accounting for capital expenditures. It represents the money that a company has available to distribute to shareholders, pay down debt, or reinvest in the business. Free cash flow is an important metric because it shows a company’s true profitability and ability to generate cash, which is ultimately what drives shareholder value.
Why is Free Cash Flow Important?
Studies have shown that companies with high free cash flow yields tend to outperform the market over the long term.
The reason free cash flow is so important is that it represents the true economic value that a company creates. While earnings can be manipulated through accounting tricks, free cash flow is much harder to fake. A company that consistently generates strong free cash flow is likely to be a high-quality business with a sustainable competitive advantage.
What is Free Cash Flow Yield?
Free cash flow yield is a valuation metric that compares a company’s free cash flow to its market value. It is calculated by dividing a company’s free cash flow per share by its current stock price. For example, if a company has free cash flow of $5 per share and a stock price of $50, its free cash flow yield would be 10% ($5 / $50).
Free cash flow yield is important because it allows investors to compare the cash generation of different companies, regardless of their size or industry. A high free cash flow yield indicates that a company is generating a lot of cash relative to its market value, which could be a sign that the stock is undervalued.
5 Stocks with High Free Cash Flow Yields
Using Validea’s guru analysis models, we’ve identified five stocks that currently have high free cash flow yields and score well based on the fundamental criteria used by some of history’s greatest investors. Here’s a closer look at each of these stocks:
Xerox is a workplace technology company that provides document systems, software, and services to businesses around the world. The stock currently has a free cash flow yield of 19.2% and scores highly based on several of Validea’s guru models, including the Shareholder Yield Investor strategy (based on Meb Faber’s approach) and the Value Composite Investor strategy (based on James O’Shaughnessy’s approach). These models favor Xerox’s strong shareholder yield (a combination of dividend yield and share buybacks) and attractive valuation multiples.
Precision Drilling is a Canada-based drilling company that provides oil and natural gas drilling services in North America and abroad. The stock currently has a free cash flow yield of 18.8% and scores highly based on Validea’s Twin Momentum Investor model (based on Dashan Huang’s approach), which looks for stocks with strong price and fundamental momentum. The model also likes Precision Drilling’s high shareholder yield and attractive valuation.
KB Home is a homebuilding company that operates in the United States. The stock currently has a free cash flow yield of 17.7% and scores highly based on Validea’s P/E Growth Investor model (based on Peter Lynch’s approach). The model favors KB Home’s strong earnings growth, reasonable valuation, and solid management execution. The stock also scores well based on the Momentum Investor and Value Composite Investor models.
SkyWest is a regional airline company that operates flights for several major U.S. airlines. The stock currently has a free cash flow yield of 13.9% and scores highly based on Validea’s Shareholder Yield Investor model, thanks to its strong dividend yield and share buybacks. The stock also scores well based on the Quantitative Momentum Investor model (based on Wesley Gray’s approach), which looks for stocks with strong price momentum and consistent returns.
The Travelers Companies, Inc. (TRV)
The Travelers Companies is a leading provider of property casualty insurance for auto, home, and business. The stock currently has a free cash flow yield of 13.3% and scores highly based on Validea’s Multi-Factor Investor model (based on Pim van Vliet’s approach), which looks for large, low-volatility stocks with strong price momentum and shareholder yields. The stock also scores well based on the Earnings Revision Investor and Momentum Investor models.
Further Research
