Many investors try to identify companies that they believe will be around for the long haul before making significant investments. Their hope is that, if the stock of any of these companies takes a nosedive, it will only be a matter of time before it rebounds.

One way to identify a company with these characteristics is to look for companies with major free cash flow (FCF). FCF is the cash flow that is available to a company; it can be used in order to repay creditors or pay dividends and interest to investors. Some investors prefer to pay attention to this aspect of a company's financials, rather than earnings or earnings per share, as a measure of its profitability.

Key Takeaways

  • One way to identify a company that is likely to rebound in the long-run–even if its stock takes a nosedive–is to look for companies with major free cash flow (FCF).
  • Free cash flow (FCF) is the cash flow that is available to a company; free cash flow can be used in order to repay creditors or pay dividends and interest to investors.
  • Some investors prefer to pay attention to this aspect of a company's financials, rather than earnings or earnings per share, as a measure of its profitability because unlike revenue or earnings, cash flow figures cannot be manipulated.
  • Apple (APPL), Verizon (VZ), Microsoft (MFST), Walmart (WMT), and Pfizer (PFE) are five companies that could be considered free cash flow (FCF) "monsters" as a result of their history of having a huge amount of free cash flow (FCF).

Why Is Free Cash Flow Important?

Revenue and earnings are both imperative metrics, but both can be manipulated. For example, retailers can manipulate revenue by opening more stores. Earnings numbers can be skewed by corporate buybacks, which reduces the share count and, ultimately, improves earnings per share (EPS).

Investors should never overlook the figures that indicate a company's FCF because, unlike revenue and earnings, cash flow can never be manipulated. In addition, a company with a good amount of free cash flow may also be more likely to make dividend payments, and engage in buybacks, acquisitions for inorganic growth, and innovation for organic growth. Not to mention that free cash flow also provides opportunities for debt reduction.

The bigger the FCF figure is, the more maneuverability the corporation is going to have. This can allow for positive growth during economic booms and flexibility during an economic downturn, regardless of if those bad times are related to the broader market, the industry, or the company itself.

All five of these companies with major FCF are also household names. This factor can play a big role in a company's staying power because of the level of consumer trust these brands have garnered.

While FCF is an important metric, it’s still only one of many metrics. It's also important to consider if a company has been growing its top line and is consistently profitable, as well as the company's debt-to-equity ratio, one-year stock performance, and dividend yield.

Five Companies With Major Free Cash Flow (FCF)

Here are five examples of companies that have historically had huge free cash flow figures:

 

 

 

FCF

 

D/E Ratio

 

1-Year Stock Performance

 

Dividend Yield

 

Apple (APPL)

 

$7.17 billion (TTM ended in 06/20)

 

0.61 (for the three months ending 06/30/20)

 

55.38% (since 12/31/19)

 

0.71% (as of 8/13/20)

 

Verizon (VZ)

 

$2.11 billion (TTM ended in 06/20)

 

1.94 (for the three months ending 06/30/20)

 

-4.39% (since 12/31/19)

 

4.20% (as of 8/13/20)

 

Microsoft (MSFT)

 

$4.52 billion (TTM ended in 06/20)

 

0.57 (for the three months ending 06/30/30)

 

32.47% (since 12/31/19)

 

0.98% (as of 8/13/20)

 

Walmart (WMT)

 

$1.84 billion (TTM ended in 04/20)

 

0.85 (for the three months ending 04/30/20)

 

11.58% (since 12/31/19)

 

2.85% (as of 8/13/20)

 

Pfizer (PFE)

 

$1.26 billion (TTM ended in 06/20)

 

0.78 (for the three months ended in 06/30/20)

 

-2.86% (since 12/31/19)

 

3.99% (as of 8/13/20)

All five of these companies have been consistently profitable, although not all of them have delivered consistent revenue growth in the same time frame. Verizon has a high debt-to-equity ratio. While this is usually a negative sign, when a company has a strong cash flow generation, it can minimize the debt risk. Although historically Apple has had periods of weak stock performance it still likely possesses the best long-term prospects (along with Microsoft). The only company on this chart that hits on all cylinders, and isn’t as discretionary as Apple, is Microsoft.

There might be years when owning Microsoft is like watching paint dry: years when it seems like a former champion. The truth is that this juggernaut is so well-managed and diversified–while still generating massive cash flow and delivering consistent profits–that it should always be just a matter of time before a rebound occurs.

The Bottom Line

The five free cash flow monsters above should be considered for further research, but only if you’re a long-term investor. There are many question markets about the global economy right now and no stock is invincible. That said, if history continues to repeat itself then the five stocks above should be safer than most. 

Dan Moskowitz does not have any positions in AAPL, VZ, MSFT, WMT or PFE.