Welcome back to the world of the Cash Kings, where we highlight businesses that generate a healthy dose of free cash flow. Why is cash flow so important? Because it gives management the opportunity to boost shareholder value through actions like:
- Paying dynasty-building dividends
- Buying back shares at attractive prices
- Growing business organically without having to borrow money or sell shares
A Fool's guide to free cash
Investing, after all, is about putting money up front today in order to get more of it in return tomorrow. Here at the Fool, we're firm believers that free cash flow, as opposed to traditional accounting earnings, is the best gauge of a firm's health and profitability (or lack thereof).
So with these cash flow lessons deeply engrained in your Foolish subconscious -- or maybe just bookmarked as a "favorites" page -- I'll highlight three more cash-flow rulers of our Motley Fool CAPS kingdom.
Unlike InterOil -- a cash-burning company that CAPS Fools overwhelmingly dislike -- these businesses have free cash flow-to-sales margins of 15% and above (also known as the Cash King Margin) and a bullish outlook from our community.
Sound the trumpets! Here's another trio of Cash Kings from CAPS:
|
Company |
Trailing-12-Month Cash King Margin |
CAPS Rating (out of 5) |
|---|---|---|
|
Diageo |
19% |
***** |
|
Automatic Data Processing |
18% |
**** |
|
Becton, Dickinson |
17% |
***** |
As always, don't consider these stocks as formal picks -- just suggestions worth further investigation. After all, due diligence is the Fool's way to riches.
But for starters, here's a quick summary of these cash-throwing kings and what some of their loyal CAPS followers feel about them.
Sultan of spirits
With an impressive free cash flow-to-sales margin of nearly 20%, Diageo takes the honors as this week's most prolific cash king.
As the world's largest premium spirits maker, Diageo has the unrivaled brand power (with eight of the top 20 brands), distribution leverage, and emerging market growth opportunities to keep its war chest stuffed with cash.
Last month, CAPS All-Star telcomac99 made a toast to the stock:
- Good dividends
- A stable market, as alcohol is relatively recession proof
- Long term growth prospects...
This company has longevity. Buy and hold long term, reap steady returns through dividends, and watch the overall value of the stock increase as the company grows in new regions around the globe.
Payroll potentate
The next cash-flow monarch on our list is ADP, one of the world's biggest payroll processors.
For decades, ADP has leveraged its capital-light business model, scale advantages, and super-stable customer base -- relative to rivals Paychex
Last month, CAPS member fooch44 tapped the stock as a timely opportunity, to boot:
With sticky customers, increasing business offerings and generating a good portion of income from the "free money float" on its investment portfolio, this company is a great long term pick. Currently punished by wall street by poor 1 year growth prospects. ... However, ADP has great financials and its commitment to dividend yield growth sends strong signals of success.
Surgical tool tycoon
Our last free-cash-flow ruler this week is medical device giant Becton, Dickinson.
Becton, Dickinson's global manufacturing scale, long track record of innovation, and key partnerships with the likes of Sanofi-Aventis
CAPS All-Star HLChin highlights a few figures to consider:
- Gross margins 52% operating margins of 20%
- Historical P/E 11-20 and currently around 14
- 2% dividend while you wait for the market to recognize its superior growth and earnings power.John Neff-ian concept with a big dash of Philip Fisher for the fair price paid for a great business and steadily growing business.
The Foolish bottom line
Free cash-flow-generating companies like Diageo, ADP, and Becton are always among my top candidates to research further. Our Motley Fool CAPS intelligence database is a great place to look for your own Cash Kings, or to read how your fellow Fools feel about thousands of different stocks.
Click here to join the forward-thinking CAPS community free of charge.
