Strong companies with stable free cash flow yields are often a good source of value for investors seeking undervalued corners of the market. But which metrics best identify companies on the strongest financial footing?
In the upcoming webcast, Can You Milk More Out of Value with Free Cash Flow Yield?, Sean O’Hara, president of Pacer ETFs Distributors, will consider the benefits of high free cash flow yield companies, a.k.a. the “cash cows,” as well as how to spot and evaluate these attractive stocks.
Investors interested in the free-cash-flow metric now have several options to choose from. For instance, the Pacer Global Cash Cows Dividend ETF (NYSEArca: GCOW), the Pacer US Cash Cows 100 ETF (NYSEArca: COWZ), the Pacer US Small Cap Cash Cows 100 ETF (BATS: CALF), the Pacer Developed Markets International Cash Cows 100 ETF (BATS: ICOW), the Pacer Emerging Markets Cash Cows 100 ETF (NasdaqGM: ECOW), the Pacer US Cash Cows Growth ETF (BUL), and the Pacer Cash Cows Fund of Funds ETF (HERD) all implement free cash flow yield screens to narrow their investing universes.
Focusing on companies with steady free cash flow can be a better approach to security selection than alternatives. Free cash flow is the cash left over after a company has paid expenses, interest, taxes, and long-term investments. It is used to buy back stocks, pay dividends, or participate in mergers and acquisitions. The ability to generate a high free cash flow yield indicates that a company is producing more cash than it needs to run the business, which can then be invested in growth opportunities.
Free cash flow companies generally have three defining characteristics — they are productive, reliable, and self-sufficient. The companies generate more cash flow than they spend, which allows them to grow without external financing. The free cash flow is a sturdy measure of profitability, which is, unlike earnings, not subject to manipulation and accounting assumptions. Lastly, as the companies are less reliant on capital markets for financing, they don’t dilute their issued company stocks.
Financial advisors who are interested in learning more about free cash flow yield can register for the Thursday, September 23 webcast here.