3 Top-Rated Cash Kings

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:

  1. Paying dynasty-building dividends,
  2. Buying back shares at attractive prices, and
  3. 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 Tesla Motors -- a cash-burning company that CAPS Fools overwhelmingly dislike -- these businesses boast free cash flow-to-sales margins 15% and above (also known as the Cash King Margin), and they've won the bullish support of 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)

Intuit (Nasdaq: INTU  )

29%

****

Paychex (Nasdaq: PAYX  )

28.8%

****

Canadian National Railway (NYSE: CNI  )

16.2%

*****

Source: Morningstar and CAPS.

As always, don't consider these stocks as formal picks but rather as 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. 

Software sultan 
With an impressive free cash flow-to-sales margin of nearly 30%, Intuit takes the honors as this week's most prolific cash king.

As the world's leading provider of accounting software, Intuit has the market dominance (Quickbooks and TurboTax enjoy market shares of 90% and 80%, respectively), high customer switching costs, and price edge over traditional tax preparers like H&R Block (NYSE: HRB  ) and Jackson Hewitt (NYSE: JTX  ) , to keep its coffers stuffed with cash.

Just last month, CAPS All-Star BigOFool offered a real-time example of Intuit's pricing power:

Intuit is raising prices on their payroll services from $10 to over $40 a month. I know because I got a notice. After extensive research I have not been able to find a more affordable option. As a client this makes me mad but as an investor this is going to boost revenue.

Payroll potentate
The next cash flow monarch on our list is Paychex, the world's second-largest payroll processor, behind only Automatic Data Processing (Nasdaq: ADP  ) .

For years, Paychex has leveraged its massive scale advantages (over 550,000 customers), laser-like focus on small to mid-sized businesses (ADP goes for the bigger guys), and high customer retention rates to generate robust cash flows for shareholders.

CAPS All-Star Nittany95 touches three tailwinds working in Paychex's favor:

1) a pickup in employment, particularly by small business, 2) a continued move toward outsourcing of administrative duties by HR departments, and 3) Inflation/rising interest rates. The first two will drive top-line growth in their main businesses. The Third will growth in their interest income on funds held for clients. ... Add to the growth a solid balance sheet and you have a pure play winner.

Railroad rajah
Our last free cash flow ruler this week is Canadian National, the only transcontinental railway company in North America.

Canadian National's operational excellence (operating margins are about 10% higher than that of rivals Union Pacific (NYSE: UNP  ) , Norfolk Southern, and Canadian Pacific Railway), barriers of entry gained through its rights-of-way, and diverse revenue sources should continue to drive wealth-building dividends and buybacks for shareholders.

CAPS member JollyViking urges Fools to hop aboard:

Warren Buffet likes railroads. With the possible exception of sail-driven cargo ships (and, at last count, there weren't that many of those), railroads are the most fuel-efficient way of shipping anything more than a couple of hundred miles. As hydrocarbon-based fuel gets more expensive, rail transport will be in increasing demand. ... As far as [Canadian National] goes, it's the best-run rail company on the continent.

The Foolish bottom line
Free cash flow-generating companies like Intuit, Paychex, and Canadian National 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 read how your fellow Fools feel about thousands of different stocks.

Click here to join the forward-thinking CAPS community free of charge.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Paychex is a Motley Fool Inside Value and Income Investor choice. ADP is also an Income Investor pick.Canadian National is a Stock Advisor selection. The Fool's disclosure policy is the strict set of rules that always rules Fools.


Read/Post Comments (2) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 09, 2010, at 3:01 PM, goalie37 wrote:

    Cash King Margin...awesome. More calculations to do. Thanks! :)

  • Report this Comment On July 12, 2010, at 12:30 PM, CPACAPitalist wrote:

    Cash is king, great article on my favorite measurement tool, free cash flow. I find it interesting that Intuit pays no dividend. Do think that is a positive aspect?

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