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 engrained 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)
|BMC Software (Nasdaq: BMC )||29.5%||Application software||****|
|Activision Blizzard (Nasdaq: ATVI )||20.0%||Multimedia and graphics software||****|
|Applied Materials (Nasdaq: AMAT )||19.4%||Semiconductor equipment||*****|
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.
IT management maven
With an impressive free cash flow-to-sales margin of roughly 30%, BMC Software takes the honors as this week's most prolific cash king.
As one of the world's leading systems management software companies, BMC has the economic moat (rooting from high switching costs), widely diversified base of Fortune 500 clients, and strong tailwinds with the rising trend of virtualization and cloud computing to keep its war chest stuffed with cash. And with the company currently in a proxy fight with activist investor Elliott Management to boost value, BMC might even be a ripe takeover target for the likes of Oracle, Hewlett-Packard, and especially the increasingly cloud-conscious Dell (Nasdaq: DELL ) .
Now THIS is how you can profit from the cloud computing transition. BMC is a company with serious competitive advantages and an established "moat" with sticky customer relationships and real pricing power. Earnings growth will be in the 12-20% range for years. ... Definite strong BUY on this stock.
Video game gerent
The next cash flow monarch on our list is Activision Blizzard, the world's largest stand-alone video game publisher.
Activision's industry-dominating game franchises (including World of Warcraft, Starcraft, Call of Duty, and Diablo), loyal and ravenous fan base (ideal for successful sequel releases), and the ever-increasing popularity of video games are what drive the copious amounts of cash for this king.
Exciting lineup of games to be released in FY2012. ... [N]o debt, lots of [free cash flow] that they use to pay a dividend and share buybacks. ~$3.5 billion in cash and short-term investments. ... With management electing to pay out dividends, and increasing the dividends, they are exhibiting confidence about [Activision] and its sustainability. [Activision] is becoming one of my core value holdings.
Chip equipment emperor
Our last free cash flow ruler this week is Applied Materials, the world's largest supplier of semiconductor manufacturing equipment.
For several years, Applied Materials has leveraged its product portfolio of more than 22,000 tools, cost-lowering scale advantages, and the increasing demand for flat-panel displays to provide strong buybacks and dividends for shareholders. While its main rivals own specific niches in the manufacturing process -- KLA-Tencor (Nasdaq: KLAC ) boasts more than 50% share of the process, diagnostics, and control market, and Lam Research is the clear leader in the tech space -- Applied Materials remains the dominant one-stop shop for chip makers.
Solid balance sheet, exposure to flat planel, solar panel and semiconductor space with growing share of mobile tech. Dividend pays [to] wait, the value here should weather a storm (when the next one comes). The [Varian Semiconductor] acquisition is causing some indigestion. I like, I'm buying.
The Foolish bottom line
Free cash flow-generating companies like BMC, Activision, and Applied Materials are always among my top candidates to research further.
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.