The Dow Jones Industrial Average (DJINDICES: ^DJI ) consists of 30 of the finest businesses in America. But within this elite group, you'll find some Dow stocks outperforming the others. Today, we'll take a look at the richest cash-flow margins on the Dow.
The first thing you'll notice here is that the widest cash margins don't always go hand in hand with strong earnings performances. Travelers (NYSE: TRV ) and GE (NYSE: GE ) both rank in the bottom half if you rank the Dow by net income margins, and the situation isn't much improved by switching to operating profits or EBIT income margins. Both companies operate much like big banks, which goes a long way toward explaining the spread between their cash flows and net margins.
Deferred and amortized policy acquisition costs play a large role in insurance giant Traveler's cash statements, and the company doesn't worry about capital expenses. You wouldn't expect an insurance firm to build factories or pump billions into capital infrastructure projects, now would you? (There are a few notable exceptions, of course.)
GE's last four quarters included $4.5 billion of non-cash bottom-line deductions to account for expected credit losses, as well as $2.5 billion in "other operating activities." Those "other" activities largely deal with "adjustments to current and noncurrent accruals and deferrals of costs and expenses, adjustments for gains and losses on assets and adjustments to assets." Walking further down GE's cash statement, you'll also find the industrial conglomerate making $22 billion from investing activities, a number that absolutely dwarfs the $14 billion in free cash flows.
In short, these are the kinds of things you'd expect a financial wrangler to get into, like a major bank or perhaps a hedge fund. GE Capital is, after all, the company's largest and most profitable division, any way you slice it.
Microsoft (NASDAQ: MSFT ) and Pfizer (NYSE: PFE ) run far more traditional business models, selling and licensing their inventions. Their operations are built around the high-margin concept of monetizing their research and development departments. Their large cash piles are a byproduct of their highly profitable core operations, but those aren't major profit centers for either company. Neither Pfizer nor Microsoft even reports a financial division along the lines of GE Capital. Microsoft's $41 million in trailing net interest income is laughable next to its $7.6 billion of operating income, and Pfizer actually pays more interest on its loans than it makes from investments.
These four massive cash machines take very different approaches to their final results, but all roads lead to Rome -- or, in this case, to the Dow's richest cash margins. And cash is still king.
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