For investors, there's nothing better than cold, hard cash. Companies that generate mounds of cash flow not only have more than enough money to invest in growth-focused initiatives, but they can also reward investors through share buybacks and dividends. Three such cash-flow machines are Gilead Sciences (NASDAQ:GILD), Cisco Systems (NASDAQ:CSCO), and Kinder Morgan (NYSE:KMI). Our Fool contributors weigh in on all three.
How does nearly $48 billion in free cash flow over the past three years sound?
Sean Williams (Gilead Sciences): When it comes to cash cows, one of the first companies that comes to mind is biotech blue chip Gilead Sciences. Gilead's primary focus is on developing therapies to treat infectious diseases, and its substantial market share in hepatitis C and HIV allows it to rake in the dough.
Though Gilead has seen its hepatitis C virus (HCV) revenue falling since 2015, it's still the dominant player. After generating more than $20 billion in HCV sales in 2015, the company anticipates $7.5 billion to $9 billion in HCV sales in 2017. However, margin in this space remains pretty juicy, even with higher gross-to-net discounting and rebates associated with added competition. Gilead's Harvoni hasn't been surpassed in efficacy or treatment time frame, and its more recently approved Epclusa, the first pan-genotypic HCV drug, has a pathway to lay claim to the lesser common HCV genotypes.
Also, it's important to realize that even though Gilead has hit the low-hanging fruit in terms of treating the sickest HCV patients in the U.S., there's a very large patient pool still left to be treated. The World Health Organization estimated there are 180 million people infected with HCV worldwide, and a couple of million have been treated thus far. While the margins may not be as robust outside the U.S., Gilead still has a long treatment runway for its HCV medicines.
Gilead Sciences has also seen its HIV product portfolio growing by a healthy percentage. Sales of its latest trio of next-generation HIV products surged higher in its recently reported Q1 results. Genvoya sales hit $769 million in Q1 (which is more than $3 billion on an extrapolated annual basis), up from $158 million in Q1 2016, while Descovy and Odefsey produced $251 million and $227 million in Q1 sales.
All told, Gilead generated $15.9 billion in free cash flow last year, and nearly $48 billion as an aggregate over the past three years. Even with reduced HCV sales, Gilead is very capable of $10 billion or more in annual free cash flow.
This cash flow means one thing: the ability to make acquisitions. Gilead has thus far been patient, but it's made no qualms about looking to supplement its infectious disease portfolio with inorganic growth. The last time Gilead made a large acquisition, it acquired Pharmasset for $11 billion in 2011 and set the foundation for its dominant HCV product portfolio. Not to mention, this cash flow is responsible for Gilead's superior 2.8% dividend yield.
Among cash cows, Gilead is certainly worth a look.
Big cash flow and returned income
Keith Noonan (Cisco Systems): A leading position in the networking hardware industry has helped Cisco build monstrous cash flow, and the company is building a strong track record of passing that income along to shareholders. The company generated roughly $12.4 billion in free cash flow in its last fiscal year and returned $8.7 billion to investors in the form of dividend disbursements and share buybacks, and it's managed to produce roughly $47 billion in free cash flow over the past five years.
Cisco has built a sizable war chest and currently holds roughly $70 billion in cash and short-term assets against debt of roughly $30 billion. The company's cash generation and accumulated assets give it the flexibility to invest in itself and pursue acquisitions, and the networking giant has already spent $4.3 billion year to date on acquisitions as it transitions to a more software-focused model.
Roughly $60 billion of Cisco's cash pile is held overseas and thus subject to sizable repatriation taxes, but a Trump administration proposal to allow the money to be moved back to the U.S. at a lower tax rate would result in dividend boosts, buybacks, and acquisitions, according to CEO Chuck Robbins.
Cisco's dividend yields roughly 3.4%, and its current annualized payout represents roughly 47% of its trailing free cash flow. Looking at the stock buyback side of things, the company has reduced its outstanding share count by roughly 6.5% over the past five years and has authorized an additional $13.4 billion in buybacks.
If you're looking for a company that generates lots of cash and passes it on to shareholders, Cisco certainly fits the bill, and it also trades at a reasonable 14 times forward earnings.
The energy tollboth company
Matt DiLallo (Kinder Morgan): Natural gas pipeline giant Kinder Morgan is a cash-collecting machine. The company makes the bulk of its money by leasing capacity on its pipelines and terminals, earning fees as volumes move through its system. That tollbooth-like business model generates very steady cash flow for the company.
Last year, for example, Kinder Morgan produced a whopping $4.5 billion in free cash flow, while this year it expects to pull in another $4.46 billion. The only reason cash flow will be down is that the company sold a pipeline system last year to reduce debt.
With so much steady cash flowing into the company's coffers each year, it has plenty of opportunities to deliver value for investors. It does that in two ways: Paying dividends and investing in growth projects. Currently, it returns about a quarter of its cash flow to investors via dividends and reinvests the rest into high-return expansion projects that will drive cash flow higher in the future. At the moment, the company has $12 billion of projects in various stages of development, which when completed will produce an estimated $1.6 billion of annual earnings. The cash flow from those expansion projects will provide the company with more money to allocate toward value-enhancing initiatives for investors, which repeats the cycle. Needless to say, investors looking for a cash flow king should take a good look at Kinder Morgan.
Keith Noonan has no position in any stocks mentioned. Matt DiLallo owns shares of Gilead Sciences and Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences and Kinder Morgan. The Motley Fool has the following options: short June 2017 $70 calls on Gilead Sciences. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.