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 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 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 Human Genome Sciences -- a cash-burning company that CAPS Fools overwhelmingly dislike -- these businesses boast free cash flow-to-sales margins of 15% or more (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:

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. 

Gaming god   
With an impressive free cash flow-to-sales margin of 22%, Activision Blizzard takes the honors as this week's most prolific cash king.

As the world's largest video game publisher, Activision Blizzard has the wildly popular lineup of console games (Call of Duty, Guitar Hero, DJ Hero), the online gaming franchises (World of Warcraft, Starcraft, Diablo), and the tailwinds from industry growth to keep its coffers stuffed with cash.

About a month ago, CAPS member Skyshark29 helped Fools peek into the pipeline:

Lots of hot games to be released in the near future, all potential and expected blockbusters. [World of Warcraft] Expansion, StarCraft II, and Diablo III all slated for late year release should allow [Activision] to outperform all of its peers over the next year or so. World of Warcraft continues to dominate the sector, and the latest expansion will only help to strengthen that hold.

Cisco the sultan
The next cash flow monarch on our list is Cisco, the world's undisputed leader in data networking.

For years, Cisco has leveraged several advantages to generate healthy cash flows for shareholders: its lead in the Ethernet switch market (70% market share, compared with second-place Hewlett-Packard (NYSE: HPQ) at just 5%), scale advantages in the enterprise router space (over the likes of Juniper (NYSE: JNPR)), and the secular trend toward Internet protocol (beating out Alcatel-Lucent (NYSE: ALU).

CAPS member JustHanginOut highlighted Cisco's recent third-quarter results as an opportunity to pounce:

So the stock gets pounded right after the company beats earnings and issues conservative guidance. While I hate being on the losing end of a vicious sell-off, I happen to think this is very healthy for a company particularly one that is as strong as Cisco. The way I see it, Cisco is the dominant player in a growing sector and will continue to lead this recovery despite the minor setback.

Coveting Covidien
Our last free cash flow ruler this week is Covidien, the diversified health-care company spun off from scandal-ridden Tyco International (NYSE: TYC) in 2007.

Covidien's strong diversification (across niche products and markets), leading position in minimally invasive surgery products, and heavy international exposure (45% of sales come from abroad) should continue to drive wealth-building dividends and buybacks for shareholders.

Just last month, CAPS All-Star Drew2142 applauded management's capital allocation skills. Here's an excerpt:

The commitment to grow, and willingness to do that through acquisitions (and organically when possible), and then actually go out and make some fairly smart purchases... means profits for the company. Profits for the company, means profits for the investors. They seem to be a market-leader in almost all of their divisions, and if they aren't, they certainly aren't bashful in selling them off for hundreds of millions using that money to gobble up smaller niche leaders and plug gaps in the portfolio.

The Foolish bottom line
Free cash flow-generating companies like Activision Blizzard, Cisco, and Covidien 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 stocks.

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