Welcome 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 the 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 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 company's health and profitability (or lack thereof).
So, with that ingrained in your Foolish subconsciousness, I'll highlight three more cash flow rulers of our Motley Fool CAPS kingdom.
Unlike homebuilder KB Home, a cash-burner that our community is currently bearish on, these are businesses with free-cash-flow-to-sales margins of at least 15% -- also known as the Cash King Margin -- that have received a CAPS rating of four or five stars (out of five).
Sound the trumpets!
Trailing-12-Month Cash King Margin
Current CAPS Rating (out of 5)
|CME Group (Nasdaq: CME )||38%||Specialized finance||****|
|Cisco Systems (Nasdaq: CSCO )||22%||Communications equipment||*****|
|Abbott Laboratories (NYSE: ABT )||19%||Drug manufacturers||*****|
Sources: Motley Fool CAPS.
As always, don't consider these formal picks, but rather suggestions worth further investigation. After all, proper due diligence is the Fool's way to riches.
But for starters, here's a quick summary of these cash-throwing kings and how some of their loyal CAPS followers feel about them.
With an impressive free-cash-flow-to-sales margin over 35%, CME Group takes the honors as this week's most prolific cash king.
As the world's largest futures exchange company, CME Group has a wide lineup of offerings (products linked to interest rates, equity indexes, commodities, etc.), differentiation through its clearinghouse business, and strong tailwinds with the rising popularity of derivatives trading, keeping its war chest stuffed with cash.
1. Risk management will continue to rise in prominence, and futures volumes will reflect that.
2. Have you seen the profitability of this business? Geez.
3. Scale, network, and reputational advantages. …
4. Return of capital to shareholders -- see new dividend policy.
5. Asset light business, great tough-to-replicate properties.
The next cash flow monarch on our list is Cisco Systems, the world's largest maker of computer networking equipment.
Cisco's powerful global brand, massive scale advantages, and high customer switching costs are what drive the copious amounts of cash for this king. While intensifying competition from the likes of Hewlett-Packard (NYSE: HPQ ) put a dent into Cisco's Ethernet switching business last year, management's recent restructuring efforts seem to have stemmed the tide: According to IDC, Cisco's share of the switch space climbed to 65.1% in the first quarter (from 63% in the year-ago period), while HP remains at a distant second with 8.3%.
Cisco is no longer an innovator, but it does big business and still dominates the router market. It also has enough cash to buy innovation via takeovers. It's back to be priced for disaster, when in fact it's corporate overhaul is nearly complete. It's not going to light up the night sky, but Cisco can be a solid performer over the next few years.
Our last free-cash-flow ruler this week is Abbott Labs, one of the world's largest broad-based health-care companies.
For years, Abbott has leveraged several blockbuster drugs (particularly its anti-inflammatory treatment, Humira), a steady revenue-generating nutritional segment, and leadership position in the diagnostics space to provide remarkably consistent dividends for shareholders. And when you consider the positive momentum in Abbott's recently expanded vascular line -- strong data on its drug-eluting stent, XIENCE, over rival Boston Scientific's (NYSE: BSX ) Taxus has led to wide market-share strides -- the stock has some attractive growth tailwinds to boot.
Abbott's charts points to one of the safest investments in the market, or at least as safe as a [pharmaceutical] company can get. Earnings announcements always slightly outperform the estimates. Regular dividends. This has been in my IRA for years, and I can probably retire with it.
The Foolish bottom line
Companies that generate free cash flow like CME Group, Cisco, and Abbott Labs are always among my top candidates for further research.
Of course, if you're crunched for time, we've compiled a special free report for investors called "Secure Your Future With 9 Rock-Solid Dividend Stocks," which uncovers several other companies generating boatloads of cash for shareholders. The report is 100% free, but it won't be around forever, so click here to access it now.