Companies that consistently generate gobs of free cash flow (FCF) over a long period of time tend to be highly profitable, well-run companies that make more money than they need. Generating a lot of FCF means a company doesn't have to rely as much on debt. And it can use that FCF to pay more dividends, buy back stock, or even reinvest in the business and accelerate its growth. 

Here's how Chevron (CVX -0.93%), Alphabet (GOOG -1.57%) (GOOGL -1.48%), and Apple (AAPL 0.55%) efficiently use their FCF to benefit shareholders. 

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Fuel your passive income with Chevron

Scott Levine (Chevron): With the recent turbulence in the banking industry, many investors are finding their risk tolerance a little lower than what it may have been a few weeks ago. Income investors, in particular, are taking a more prudent approach to dividend stocks. After all, an attractive dividend yield means little if the company providing it will be unable to sustain the distribution. In particular, this renewed focus on the financial health of dividend payers has investors looking for companies that generate strong free cash flow.

One company in that camp is oil supermajor Chevron. For 36 years, Chevron has consistently hiked its dividend, demonstrating a steadfast commitment to rewarding shareholders and earning it a place among the most highly respected dividend-paying stocks. 

Over the past two years, Chevron has generated robust free cash flow thanks to high energy prices. With benchmarks West Texas Intermediate and Brent Crude reaching as much as $100 per barrel -- or more -- Chevron posted a company record for free cash flow: $37.6 billion in 2022. Of course, this won't be the case permanently due to the cyclical nature of energy prices. Nonetheless, management stated in a recent investor presentation that, on average, it's targeting 10% average annual free cash flow growth.

While the shares have been attractive for some time, a recent decline in energy prices has led to a sell-off in Chevron's stock; consequently, investors have the opportunity to gas up their portfolios on the cheap. Whereas Chevron has a five-year average forward-earnings multiple of 37.6, it's currently trading at 9.7 times forward earnings.

What will Alphabet do with its cash flow?

Lee Samaha (Alphabet): If you want free cash flow, then Google owner Alphabet is the place to start. According to Wall Street estimates, the company is set to generate an incredible $250 billion in free cash flow over the next three years. It's a huge number. Consider that it represents 21.6% of the company's $1.18 trillion market capitalization. Moreover, Alphabet is forecast to end 2023 with $122 billion in net cash.

Whichever way you look at it, Alphabet is oozing with cash, and its dominant position in search means its potential to grow along with the online economy looks assured. The company faces a potential challenge from the need to add artificial intelligence (AI) to its search capability -- perhaps more of a cost issue than anything. However, even adding a few billion to the costs associated with AI leaves Alphabet looking cheap. 

Furthermore, Alphabet continues to grow its Google Cloud revenue as it marches toward profitability, long-term recurring revenue, and cash flow. It's an attractive business because cloud customers tend to be sticky, and there's no let-up in the growth of data generated in the economy as the world gets connected. 

All told, Alphabet's long-term future looks bright, and it's underpinned by prodigious cash-flow generation that could ultimately end up with a significant dividend payout to investors.

Apple has put on a capital allocation clinic over the past decade

Daniel Foelber (Apple): Apple has grown to become the most valuable U.S.-based company by market capitalization. And for good reason.

Apple blends hardware and software, as well as products and services, to create an integrated ecosystem that includes phones, tablets, computers, wearables, headphones and earbuds, and even other avenues like music, streaming, financial services, and more. Given the dominance of Apple today, it's easy to lose sight of where the company was not too long ago.

A little over a decade ago, Apple was diluting its stock and its outstanding share count was rising. It wasn't consistently FCF positive and it didn't pay a dividend. Then, in March 2012, Apple announced a quarterly dividend. And since then, the company has steadily raised its dividend. But more importantly, Apple has grown FCF at warp speed, which has allowed it to buy back a boatload of its own stock -- so much so that Apple's share count is down 40% in the last 10 years. And that boosts its earnings per share. 

AAPL Shares Outstanding Chart

AAPL Shares Outstanding data by YCharts

In the above chart, you can see that Apple spends the vast majority of its FCF on stock buybacks. Its dividend routinely makes up less than 20% of FCF.

Apple's FCF cushion gives the company a margin of safety during economic cycles. Even if its growth slows and demand for its products and services falls, Apple is well-positioned to pay a dividend and be able to buy back its stock. This is a major advantage not enjoyed by other companies. During bear markets that coincide with economic recessions, it is common to see companies that are unable to buy back their own stock when the price is down because its business is under pressure and it is too cash-strapped.

Apple isn't the cheapest stock in the world -- with a price-to-earnings ratio of 25.9 and a price-to-FCF multiple of 25.3. But the stock arguably deserves to trade at a market premium given the strength of the brand and business. Apple also isn't a passive income powerhouse like Chevron. But for investors more focused on total returns than dividends alone, Apple stands out as a safe stock worth considering.