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)
|Celgene (Nasdaq: CELG )||36%||Biotechnology||*****|
|BlackRock (NYSE: BLK )||31%||Asset management||****|
|BHP Billiton (NYSE: BHP )||19%||Industrial metals and minerals||****|
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 of roughly 35%, Celgene takes the honors as this week's most prolific cash king.
As one of the world's leading cancer and immune-inflammatory drug companies, Celgene has the robust pipeline (funded over the years by multiple myeloma blockbuster Thalomid) and widening competitive moat (bolstered by recent purchases of Pharmion and Abraxis) to keep its war chest filled with cash. And in spite of regulatory risks and increasing competition from the likes of Onyx Pharmaceuticals' (Nasdaq: ONYX ) Kyprolis, Celgene's Revlimid -- a less toxic derivative of Thalomid -- remains a particularly potent source of growth.
My favorite biotech stock. Although there may be better [speculative] plays out there, [Celgene] is already established with high earnings growth and a compelling valuation. This company has many drugs in the pipeline to continue its growth for the future.
Asset management maven
The next cash flow monarch on our list is multinational investment firm BlackRock, the world's largest asset manager.
BlackRock's sheer scale advantages ($3.5 trillion in assets under management), sticky institutional client base, and wide range of product offerings (both active and passive strategies) are what drive the copious amounts of cash for this king. And with BlackRock's recent plan to repurchase as much as $1 billion worth of shares from banking giant Barclays (NYSE: BCS ) , it's clear that management is allocating that capital in a shareholder-friendly fashion.
Earlier this summer, All-Star tomlongrpv chimed in on the opportunity: "I have owned some of their mutual funds and also seen their management skills up front. The company is an impressive compilation of intelligent individuals. [That] seems likely to bring high profits in the future."
Our last free cash flow ruler this week is BHP Billiton, the world's largest diversified mining company.
For years, BHP has used its wide diversification (across countries, products, and markets), solid portfolio of low-cost/high-quality assets, and close proximity to resource-hungry Asian economies to generate robust, as well as relatively steady cash flows for shareholders.
A few months ago, ifni succinctly summed up the bull case: "In my opinion, BHP represents the best single company diversified natural resources play. With divisions focused on petroleum, base metals, iron ore, manganese, coal (both metallurgical and energy), steel, and specialty products (such as diamonds), BPH delivers exactly what the world's rapidly industrializing and growing nations need."
The Foolish bottom line
Free cash flow-generating companies like Celgene, BlackRock, and BHP 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.