Welcome back 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:
1. Paying dynasty-building dividends,
2. Buying back shares at attractive prices, and
3. Growing 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 in order 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 firm's health and profitability (or lack thereof).
So, with these cash flow lessons deeply engrained in your Foolish subconscious -- or maybe just bookmarked as a "favorites" page -- I'll highlight three more cash-flow rulers of our Motley Fool CAPS kingdom.
Unlike Dendreon -- a cash-burning company that CAPS Fools overwhelmingly dislike -- these businesses boast free cash flow-to-sales margins 15% and above (also known as the Cash King Margin), and they've won the bullish support of our community.
Sound the trumpets! Here's another trio of Cash Kings from CAPS:
|
Company |
Trailing-12-Month Cash King Margin |
CAPS Rating (out of 5) |
|---|---|---|
|
AstraZeneca (NYSE: AZN) |
24.5% |
**** |
|
EMC (NYSE: EMC) |
22.7% |
**** |
|
Medtronic (NYSE: MDT) |
22.6% |
**** |
As always, don't consider these stocks as formal picks but rather as suggestions worth further investigation. After all, due diligence is the Fool's way to riches.
But for starters, here's a quick summary of these cash-throwing kings, and what some of their loyal CAPS followers feel about them.
Zen-eca master
With an impressive free cash flow-to-sales margin of nearly 25%, AstraZeneca takes the honors as this week's most prolific cash king.
As one of the world's largest pharmaceutical companies, Astra has the potent product portfolio (including gastrointestinal drug Nexium, cholesterol combatant Crestor, and antipsychotic Seroquel), expanding biologics presence, and emerging market growth opportunities to keep its dividend growing for shareholders.
Early this year, CAPS All-Star georcole touched on the attractive income opportunity:
They have growth all over the place: revenue, earnings, dividend. They have a lower PE than Pfizer (NYSE: PFE) and also have a higher [dividend yield] than them as well. As a boost of confidence to their shareholders, they have continued to raise their dividend while [Pfizer] cut theirs and [Merck (NYSE: MRK)] hasn't changed theirs in a while.
Sultan of storage
The next cash flow monarch on our list is EMC, a world leader of hardware, software, and services for enterprise network storage.
For years, EMC has leveraged the huge trends towards digitization, its industry standard virtualization solutions (offered through its VMware (NYSE: VMW) subsidiary), and its massive distribution network (driven by powerful channel-partners like Dell (Nasdaq: DELL)) to keep its fortress flush with cash.
Two months ago, CAPS member knnryerye tapped EMC as a virtual no-brainer:
More and more companies are turning to virtual datacenter and "cloud computing" as budgets are shrunk, and yet demand is still high. Network storage is vital to this working and EMC is the leader. As companies change to virtual datacenters and virtual desktops EMC will continue to grow.
Medical device maven
Our last free cash flow ruler this week is Medtronic, the world's largest medical device maker.
Medtronic's dominance in the diabetes, pacing, and cardiac rhythm markets (65%, 53%, and 52% market share, respectively), knack for innovation, and exciting growth prospects in treating atrial fibrillation, should continue to drive shareholder-friendly dividend hikes and share buybacks for this king.
Two weeks ago, CAPS member singalls11747 tapped the stock as a bargain, to boot:
Earnings projections from management in the area of $3.50 and a historical P/E of 20 to 25. The balance sheet is strong ... and the stock sits in the mid to high $30's. Perhaps the market thinks the 60 new products scheduled for introduction this year will flop. But those will only add to the outstanding performance the [Medtronic] is turning in. When fear turns to greed, [Medtronic] will see its day.
The Foolish bottom line
Free cash flow-generating companies like AstraZeneca, EMC, and Medtronic are always among my top candidates to research further. Our Motley Fool CAPS intelligence database is a great place to look for your own Cash Kings or read how your fellow Fools feel about thousands of different stocks.
Click here to join the forward-thinking CAPS community free of charge.
