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 such as:
- Paying dynasty-building dividends
- Buying back shares at attractive prices
- 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 firmly believe 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 Amag Pharmaceuticals (Nasdaq: AMAG) -- a cash-burning company that CAPS Fools overwhelmingly dislike -- these businesses boast free cash flow-to-sales margins of 15% or greater (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) |
|---|---|---|
|
France Telecom (NYSE: FTE) |
18.9% |
***** |
|
Autodesk (Nasdaq: ADSK) |
18.6% |
**** |
|
Bristol-Myers Squibb (NYSE: BMY) |
17.7% |
**** |
As always, don't consider these stocks as formal picks -- just 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.
French emperor
With an impressive free cash flow-to-sales margin of nearly 19%, France Telecom (FT) takes the honors as this week's most prolific cash king.
As one of the world's largest telecom carriers, FT has the fixed-line scale advantages (68% market share in France), global reach (more than 132 million customers in more than 50 countries), and emerging-market growth potential (through its Orange wireless segment) to keep its war chest stuffed with cash.
CAPS member aitraders expands on the income opportunity:
[T]he provider of the Orange network has become very dividend focused in recent past and this focus has allayed most of my concerns investing in a company part owned by France. They also have excellent exposure and focused growth opportunities in emerging markets. It hit my sweet spot for covering some holes in my allocation.
Dictating design
The next cash flow monarch on our list is Autodesk, the undisputed leader in the world of computer-aided design drafting (CAD).
For years, Autodesk has leveraged its dominance over the likes of Dassault Systems (Nasdaq: DASTY) and Parametric Technology, taking advantage of powerful network effects and high switching costs to provide healthy cash flows for shareholders.
CAPS member NollierCapMgmt elaborates:
[Autodesk] is a cash cow which generates a ton of [free cash flow]. Additionally, it sports no debt. Its competitive advantage or moat is its CAD software which helps to promote high switching costs. [Autodesk] is very good at annuitizing its business. However, it is not immune or insulated from the global recession but will weather the storm far better than its competitors.
Pharma pasha
Our last free cash flow ruler this week is Bristol-Myers Squibb, one of the world's biggest pharmaceutical companies.
Its strong portfolio of drugs (especially for cancer treatments), robust mid-to-late-development pipeline, and key partnerships with the likes of AstraZeneca (NYSE: AZN) and Pfizer (NYSE: PFE) should continue to drive consistent dividend hikes and share buybacks for this king.
Last month, CAPS member WECpoker tapped the stock as a timely opportunity, to boot:
It's time for the beleaguered drug stocks to take their turn in the stock market run-up. They have been left behind for the most part, and the PEs seem to reflect that none will be left in business in a few years. We know that is not the truth and it makes sense that Bristol-Myers has a great chance to grow ... and have positioned themselves to become a leader in the Cancer treatment industry.
The Foolish bottom line
Free cash flow-generating companies such as France Telecom, Autodesk, and Bristol-Myers Squibb are always among my top candidates for further research. Our Motley Fool CAPS intelligence database is a great place to look for your own Cash Kings, or to read how your fellow Fools feel about thousands of different stocks.
Click here to join the forward-thinking CAPS community free of charge.
