### My Watchlist

Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.

Recs

# Meet the Cash Kings of Health Care

As an investor, it pays to follow the cash. If you figure out how a company moves its money, you might eventually find some of that cash flowing into your pockets.

In this series, we'll highlight four big dogs in an industry, and compare their "cash king margins" over time, trying to determine which has the greatest likelihood of putting cash back in your pocket. After all, a company can pay dividends and buy back stock only after it's actually received cash -- not just when it books those accounting figments known as "profits."

The cash king margin
Looking at a company's cash flow statement can help you determine whether its free cash flow actually backs up its reported profit. Companies that can create 10% or more free cash flow from their revenue can be powerful compounding machines for your portfolio.

To find the cash king margin, divide the free cash flow from the cash flow statement by sales:

Cash king margin = Free cash flow / sales

Let's take McDonald's as an example. In the four quarters ending in June, the restaurateur generated \$6.87 billion in operating cash flow. It invested about \$2.44 billion in property, plant, and equipment. To calculate free cash flow, subtract McDonald's investment (\$2.44 billion) from its operating cash flow (\$6.87 billion). That leaves us with \$4.43 billion in free cash flow, which the company can save for future expenditures or distribute to shareholders.

Taking McDonald's sales of \$25.5 billion over the same period, we can figure that the company has a cash king margin of about 17% -- a nice high number. In other words, for every dollar of sales, McDonald's produces \$0.17 in free cash.

Ideally, we'd like to see the cash king margin top 10%. The best blue chips can notch numbers greater than 20%, making them true cash dynamos. But some businesses, including many types of retailing, just can't sustain such margins.

We're also looking for companies that can consistently increase their margins over time, which indicates that their competitive position is improving. Erratic swings in margins could signal a deteriorating business, or perhaps some financial skullduggery; you'll have to dig deeper to discover the reason.

Three companies
Today, let's look at UnitedHealth Group (NYSE: UNH  ) and three of its peers:

Company

Cash King Margin (TTM)

1 Year Ago

3 Years Ago

5 Years Ago

UnitedHealth Group 7.7% 5.8% 3.7% 7.4%
WellPoint (NYSE: WLP  ) 5.7% 0.7% 4.6% 6.1%
Cigna (NYSE: CI  ) 6.0% 7.1% 7.3% 4.4%
Aetna (NYSE: AET  ) 6.8% 3.4% 6.5% 6.1%

Source: Capital IQ, a division of Standard & Poor's.

None of these companies meets our 10% threshold for attractiveness, but UnitedHealth offers steady growth in its cash king margins over the past three years, but only a little above where it was five years ago. WellPoint's margins are currently lower than they were five years ago, while Cigna and Aetna have seen increases from five years ago. Compare these returns to the blue chips of software and biotech, to get some context.

The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash -- but that doesn't necessarily make them poor investments. You'll need to look closer to determine exactly how a company is using its cash.

Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.

Want to read more about UnitedHealth Group? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Jim Royal owns shares of McDonald's. The Motley Fool owns shares of UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of McDonald's, UnitedHealth Group, and WellPoint. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

### Compare Brokers

Fool Disclosure

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1662018, ~/Articles/ArticleHandler.aspx, 7/30/2015 2:18:51 AM

### Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

### Sending report...

Jim Royal
TMFRoyal

Jim is a special-situations investor focusing on transactional events (such as spinoffs, recapitalizations, or reorganizations, among others) that create advantageous stock mispricings.

### Today's Market

 updated 5 hours ago Sponsored by: DOW 17,751.39 121.12 0.69% S&P 500 2,108.57 15.32 0.73% NASD 5,111.73 22.53 0.44%

### Create My Watchlist

Go to My Watchlist

##### You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

### Related Tickers

7/29/2015 4:02 PM
 UNH \$121.52 +0.00 +0.00% UnitedHealth Group CAPS Rating:
 AET \$112.60 +0.29 +0.26% Aetna, Inc. CAPS Rating:
 ANTM \$155.27 +1.07 +0.69% Anthem CAPS Rating:
 CI \$145.41 -0.46 -0.32% Cigna Corporation CAPS Rating: