Cash flow is a key metric for evaluating a stock, especially for long-term value investors interested in cash flow stocks. In fact, it is one of the core sources of funds for a well-run company to pay dividends. Accumulating cash flow into reserves also allows companies to engage in stock buybacks, supporting the price of cash flow stocks over time.
Examining a company’s cash flow history is sensitive for investors seeking dividend income or share price appreciation. Empirical evidence shows that cash flow stocks of businesses with consistent cash generation tend to outperform the market in both the medium and long run.
The free cash flow yield is a helpful method to evaluate the money available to pay back stockholders. It relates a firm’s annual cash flow per share to its market price. This metric helps identify cash flow stocks of companies generating the most cash available per share to reinvest or return to shareholders.
Companies sitting on mountains of money have the potential to reward shareholders and may experience stock price appreciation. Several cash flow stocks warrant examination, with the following three offering solid thesis:
Xerox (XRX)
Xerox (NASDAQ:XRX) is one of the cash flow stocks warranting examination. Although the company is viewed as an everyday office service and hardware company, it has a strategic advantage. At the close of the previous fiscal year, Xerox maintained $5.2 million in cash and equivalents on hand and expanded its annual free cash flow to $686 million from $159 million. In addition to debt repayment, management reinvests a significant portion of cash flows into share repurchases. This is expected to support share price stability, strengthening the case as one of the cash flow stocks to consider.
Xerox boasts a free cash flow yield of 35.8%, far exceeding the IT sector average of 1.1%. The company exemplifies strong cash flow generation potential relative to competitors. Its current dividend yield of 6.1% further improves shareholder return, with three more analysts turning bullish on XRX just in March. The organization has positioned itself as one of the cash flow stocks under consideration through disciplined cash flow management.
Precision Drilling (PDS)
The recent spike in oil prices has allowed several oil and gas service firms to build strong cash-generation capabilities. Canadian-based drilling services provider Precious Drilling (NYSE:PDS) is one of the cash flow stocks with metrics exceeding industry averages by large. With a free cash flow yield of 21%, over ten times the industry median, it stands out as a true cash flow king. PDS is a solid pick partly thanks to its relatively low price-to-earnings (P/E) ratio of just 4.7x. This represents an undervalued cash flow stock for investors seeking exposure to the energy sector’s current and future cash windfall.
Precision Drilling is set to announce its latest quarterly earnings this Thursday. Analyst estimates for the company’s earnings are optimistic, with price targets 44% above current levels. The company’s financials have been improving, with rising revenue, adjusted EBITDA and earnings. With global oil demand rising in coming years, Precision Drilling’s case as one of the cash flow stocks is appealing.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), the global search engine and cloud computing company, also stands out as one of the cash flow stocks due to its significant cash generation. In the previous year, Alphabet generated $107.7 billion in cash flow and spent $61.5 billion on share buybacks, where most of its cash is currently sitting. While its $2 trillion market cap results in a lower ratio than other high cash flow generating companies, its free cash flow yield of 3.6% remains twice above competitors’ average of 1.6%. Overall, Alphabet demonstrates industry-leading cash generation capabilities that allow for substantial capital returns to shareholders.
The company is also scheduled to report its first-quarter earnings this week, on April 25. Truist analysts raised their price target by 12% due to sustained user engagement, the Waymo expansion, and the potential for a dividend. They also cited cost management and ad revenue growth on search and social platforms as the main reasons for expecting first-quarter results to exceed estimates.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.