What are we looking for?
Greenback-spewing cash machines.
To be more specific, we’re hunting for U.S. companies that can generate lots of cash even after covering all expenses. (We performed a similar screen for Canadian stocks last week.) By virtue of their ability to generate cash, these companies are in a great position to take advantage of investment opportunities. That should – at least in theory – bode well for these firms’ shareholders.
More about today’s screen
Craig McGee, senior consultant at CPMS Morningstar Canada, created today’s offering.
He filtered the CPMS database of U.S. companies for large firms with high levels of free cash flow in comparison to their stock prices, revenues and debt. (For purposes of this screen, we defined free cash flow as operating cash flow after subtracting capital expenditures.) Mr. McGee looked for firms with:
[bullet]/note>– a market cap greater than $1-billion (U.S.);
[bullet]/note>– free cash flow yield (free cash flow divided by price) greater than 10 per cent;
[bullet]/note>– free cash flow margin (free cash flow divided by revenue) greater than 10 per cent;
[bullet]/note>– a ratio of free cash flow to long-term debt that is greater than 1;
[bullet]/note>– an interest coverage ratio (free cash flow divided by interest expense) greater than 5.
The list is sorted by total return year-to-date.
More about CPMS
CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers through software and Web-based tools.
It covers more than 700 Canadian and 2,200 U.S. stocks, and adjusts for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.
What did we find?
A diversified list of companies, nearly half of which have lost money for shareholders this year.
That disappointing performance suggests that free cash flow is not something the market is willing to pay a lot for these days. Perhaps that is because interest rates are low so the ability to generate cash internally is not seen as being particularly valuable.
However, that sentiment could change if monetary conditions tighten. As a rule, companies with lots of free cash flow do pay off for shareholders. This list is a good place to start your research.