Welcome 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 like:
Paying dynasty-building dividends.
Buying back shares at attractive prices.
Growing the 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 to get more of it in return tomorrow. Here at the Fool, we're firm believers that free cash flow, as opposed to traditional accounting earnings, is the best gauge of a company's health and profitability (or lack thereof).
So, with that engrained in your Foolish subconscious, I'll highlight three more cash-flow rulers of our Motley Fool CAPS kingdom.
Unlike homebuilder KB Home, a cash-burner that our community is currently bearish on, these are businesses with free cash flow-to-sales margins of at least 15% -- also known as the Cash King Margin -- that have received a CAPS rating of four or five stars (out of five).
Sound the trumpets!
Trailing-12-Month Cash King Margin
Current CAPS Rating (out of 5)
American Tower (NYS: AMT)
Diversified communication services
Altria (NYS: MO)
Stryker (NYS: SYK)
Medical appliances & equipment
<h6>Sources: Motley Fool CAPS.</h6>
As always, don't consider these formal picks but rather as suggestions worth further investigation. After all, proper due diligence is the Fool's way to riches.
But for starters, here's a quick summary of these cash-throwing kings and how some of their loyal CAPS followers feel about them.
Tower of power
With an impressive free cash flow-to-sales margin of roughly 30%, American Tower takes the honors as this week's most prolific cash king.
As the world's largest independent operator of wireless tower sites, American Tower has the best-in-class operating efficiency (revenue per-tower and operating margins easily top that of main rivals Crown Castle (NYS: CCI) and SBA Communications), exposure to high-growth international markets, and the longest lease contracts in the business to keep its war chest filled with cash.
With the mass emergence of smartphones and tablets, laptops and desktops are a thing of the past. Tablets that provide the same abilities of laptops are already selling for $250. Without even taking into account the market in the US, Brazil, India, Mexico, and all others will generate at least a billion data users within the next 2 years. ... [G]rab it while it is still affordable.
The next cash flow monarch on our list is cigarette giant Altria, the largest U.S. tobacco company.
Altria's sheer scale advantages (owns about 50% of the U.S. tobacco market), powerful cigarette brands (Marlboro dominates with roughly 40% share), and steadily growing smokeless products segment are what drive its copious amounts of cash. And while Altria doesn't have exposure to exciting emerging markets like former asset Philip Morris International (NYS: PM) , a current dividend yield of 5.3% -- versus PM's of 3.7% -- might be juicy enough to make up for it.
Altria is the leading producer of cigarettes and has [50% of the U.S. market]. ...The company has an investment grade credit rating and generates returns to investors through a hefty dividend. The company is trading ... appropriate for the industry. However, I think the company will realize higher earnings -- coupled with an attractive and rising dividend -- to make it a good buy.
Our last free cash flow ruler this week is Stryker, one of the world's largest medical device companies.
For years, Stryker has used its leadership position in reconstructive orthopedic implants, robust portfolio of operating room products, and exposure to growing international markets to provide steady stock repurchases and rising dividends for shareholders.
I ran a 5 star CAPS screen and equally weighted it with a 'quality' factor (high gross margin & high ROE multiple) and a 'value' factor (Low PE, PS, PB multiple). ... Upon further investigation, Stryker looks to have quality earnings, high returns on investment, and a reasonable price tag. Stryker is also sporting a modest dividend yield while growing sales and earnings at a steady clip.
The Foolish bottom line
Free cash flow-generating companies like American Tower, Altria, and Stryker are always among my top candidates to research further.
Of course, if you're crunched for time, we've compiled a special free report for investors called "Secure Your Future With 9 Rock-Solid Dividend Stocks," which uncovers several other companies generating boatloads of cash for shareholders. The report is 100% free, but it won't be around forever, so click here to access it now.
The article 3 More Kings of Cash originally appeared on Fool.com.
Fool contributor Brian Pacampara has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Tower . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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