Free cash flow (FCF) yield is a measure of value that investors often look at to determine the potential return on investment. Companies with high free cash flow yields are desirable, while low FCF yields are signal a poor return for investors. One downfall of FCF yields is that it is typically backward looking, unless you develop a proprietary model. (To learn more, see Free Cash Flow Yield: The Best Fundamental Indicator.)
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FCF yield takes into account capital expenditures and other ongoing operating costs that may not be included in cash flow from operations. Using levered free cash flow also accounts for the interest paid on debt obligations, thus FCF tends to be viewed as the truest sense of shareholder return.
Companies Worth Watching
- Oshkosh Corporation (NYSE:OSK)
OSK manufactures and sell various specialty vehicles including department of defense vehicles like trucks and tanks, specialty equipment for construction and agriculture, and fire and emergency vehicles. OSK has a market cap of $2.41B and a trailing twelve month (ttm) levered FCF of $857.46 M resulting in a levered FCF yield of 35.6%. While the company is dependent on the local and federal government contracts, its diverse product line gives it some staying power.
- The Navigators Group, Inc., (Nasdaq:NAVG)
This international insurance holding company has a particular focus on underwriting marine insurance in the U.S., U.K., Belgium and Sweden. The company has a $665M market cap and a ttm-levered free cash flow of $118.82M resulting in a FCF Yield of 17.9%. This ratio indicates that a shareholder would yield almost 18% based on the share price at the time of the calculation. Any share price appreciation would increase the return to the shareholder although the FCF yield will decline.
- Hallmark Financial Services, Inc. (Nasdaq:HALL)
Similar to NAVG, Hallmark focuses on commercial and personal property/casualty insurance products in the United States. HALL has $171.25M market cap and a $23.04M ttm-levered free cash flow resulting in a levered free cash flow yield of 13.5%. Although not as high as NAVG, the more geographic concentration and smaller market cap makes this company slightly more risky.
- Beasley Broadcast Group, Inc., (Nasdaq:BBGI)
This is an American radio company, which broadcasts programs and sells advertising. BBGI has an $85.3M market cap and a ttm-levered free cash flow of $7.77M, resulting in a 9.1% levered free cash flow yield. The company is a small operator of radio stations in the United States, an industry that has experienced challenges, but seems to have leveled off.
The Bottom Line
A high FCF yield, usually defined as a ratio greater than the market FCF yield which typically is around 4-6%, is desirable. The use of free cash flow yield as a measure of shareholder return is a quick screen, but the need to review other fundamentals of a company still exists. Although the ratio may above the market spurring a positive investment decision, projecting the free cash flow for the next 12 months would be an even more powerful measure.
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