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What are we looking for?

Large-cap U.S. companies with growing cash flow.

The screen

Two weeks ago, I wrote about Canadian-listed companies with growing cash flow, as a reminder that a company’s cash flow can afford it the ability to weather economic downturns and invest in future growth opportunities. This week, I turn my attention to a similar strategy for the U.S. market. To start with, I used Morningstar CPMS to rank stocks in the S&P 500 index on the following metrics:

  • Free-cash-flow yield (which compares free cash flow with a company’s enterprise value, higher values preferred);
  • Quarterly and annual cash flow momentum (trailing four quarters operating cash flow compared with the same figure one quarter and four quarters ago, respectively);
  • Standard deviation of total returns over the past five years (measuring the volatility of the company’s stock price over the past five years, lower figures preferred);
  • Return on invested capital (net operating profit after taxes divided by invested capital);
  • Variation of fiscal EPS estimates (a statistical measure that looks at how consistent analyst projections are for the coming fiscal year. A lower “spread” implies that equity analysts have a common view. More consistent projections from analysts are viewed here as a safety metric, lower figures preferred).

To qualify, the company must pay a dividend and must be expected to raise that dividend in the coming 12 months (as announced by the corporation itself).

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 120 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from January, 2006, to August, 2019. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than three per economic sector. Once a month, stocks were sold if their rank fell below the top 35 per cent of the universe, or if the company stopped paying dividends. When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio.

Over this period, the strategy produced an annualized total return of 11.8 per cent while the S&P 500 Total Return index gained 8.5 per cent. In the 12-month period ended August, 2019, the strategy produced 11.7 per cent while the index advanced 2.9 per cent.

The stocks that qualify for purchase today are listed in the table below. It is always recommended to speak to a financial adviser or investment professional before investing.

Select U.S.-listed large caps

RankCompanySymbolMkt. Cap. (US$ Mil.)FCF Yld. (%)Ann. CF Mom. (%)Qtrly. CF Mom. (%)5Y Std. Dev. of Ttl. Rtns.Var. of Fisc. EPS Estim. (%)Rtn. on Invest. Cap. (%)Trailing ROE (%)Expected Div. Grth. Rate (%)Div. Yld. (%)Recent Close (US$)
1Bristol-Myers SquibbBMY-N79,432.88.322.416.725.96.240.849.41.23.448.56
3Home Depot Inc.HD-N255,170.73.815.21.418.80.534.11727.913.82.3233.00
4Mastercard Inc.MA-N276,
5Visa Inc.V-N395,095.12.830.66.820.91.022.541.34.20.6176.35
6Rockwell AutomationROK-N19,174.04.369.
7Intuit Inc.INTU-Q69,585.33.314.5-2.423.40.878.450.912.80.8267.56
8Stryker Corp.SYK-N79,942.
9S&P Global Inc.SPGI-N62,
10PepsiCo Inc.PEP-Q189,955.32.810.3-3.514.51.424.462.42.22.8135.86
11C.H. RobinsonCHRW-Q11,737.36.621.10.621.44.723.442.72.02.386.70
12Masco Corp.MAS-N12,
13Ross Stores Inc.ROST-Q39,445.
14TJX Companies Inc.TJX-N68,812.
15Texas InstrumentsTXN-Q118,607.

Source: Morningstar CPMS

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

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