They say 'cash is king", but for companies there's another kind of cash that is the king of kings.
In a Sydney Morning Herald article, the investment bank UBS highlighted a number of companies with great free cash flows.
Most people know terms like "profit" or "earnings", but they may not be as familiar with what free cash flow is.
All the money the company generates in excess of what it needs to run the business, invest back into the company to maintain current operations and pay dividends is the free cash flow. The company is "free" to invest and use that money at its discretion to grow the company even more.
Successful businesses make more than just enough to pay the bills and stay open, they have good cash flows of income well above their needs.
Companies also pay dividends and return capital to shareholders in other ways like share repurchases. Then there's replacing and buying equipment, etc. All of that costs money.
UBS said in its research paper Asciano Ltd (ASX: AIO) and Flight Centre Travel Group Ltd (ASX: FLT) are likely to generate strong free cash flow in the near term. UBS stated free cash flow is considered one of the most important factors by yield investors since it indicates whether or not a company can maintain its dividend in a bad economy or business downturn.
Asciano, the rail transport company that operates the Pacific National train line, pays a 2.5% yield fully franked. Although not huge, its stable business and earnings growth forecast of 11% annually over the next few years indicate the company should have ample free cash flow to maintain and potentially grow dividends.
Likewise, Flight Centre, Australia's largest travel agency company, has good free cash flow because its long-term debt is extremely low and interest payments aren't a burden. Earnings are not expected to rise much more than in the mid-single digits, but the company is investing a lot of money in expanding its overseas business. That investment expense makes earnings growth "look" small, but it has the free cash flow to pay for the expansion. The stock yields 4.0% fully franked.
Of these two stocks, I prefer Flight Centre since there is more potential growth in the long term for international business.