Source: NYSE, Facebook
When it comes to household names and safe-haven investments, perhaps no group of stocks is counted on more than the 30 that comprise the Dow Jones Industrial Average .Made up of 30 multinational giants from multiple industries, the Dow Jones is full of companies paying healthy dividends. But it's what's behind these dividends that makes them so attractive: enormous cash flow.
Continue Reading Below
Cash flow is what allows the Dow's 30 components to allocate capital to its shareholders in the form of dividends and share buybacks, as well as fuel other critical facets of business activity, such as research and development, which allow these global giants to stay ahead of their peers.
Cash flow may not be everything -- as it's still possible for a company to be cash flow positive but lose money -- but it's often a good indicator as to the health of a company. With that in mind, let's take a closer look at which 10 Dow stocks have the most robust cash flow and dig a bit deeper behind the numbers for a few of these companies.
Source: Flickr user Torbakhopper.
10 Dow stocks with huge cash flow The real allure of Dow stocks is their incredible cash flow. Derived from some combination of their size, brand loyalty, and innovation, the Dow's 30 components combined, based on data from Morningstar, for $285.5 billion in free cash flow in 2014. What this means is that plenty of cash is left over to potentially reward shareholders with share buybacks or increased dividend payments.
Of course, no two Dow stocks are created equally. Some are literally raking in the cash hand over fist, while a few are struggling just to generate positive free cash flow. Let's first have a closer look at the 10 Dow stocks with huge cash flow, and then dig a bit deeper to size up what's really going on behind some of these numbers.
Three important points worth notingThe first thing an investor has to realize is that free cash flow (FCF) isn't an end-all, do-all investment number. While strong free cash flow can signify a company's ability to buy back its stock and generate income from existing products, it doesn't tell us how a company is set up over the long run.
Source: Pfizer, Facebook.
In our example above we have Pfizer generating more FCF than Johnson & Johnson, but the two companies are on far different paths. Based on Pfizer's 2015 full-year forecast of $44.5 billion to $46.5 billion in revenue, at the midpoint it'll have shed nearly $22 billion from its top-line since 2010 due to the negative effects of patent losses (e.g., Lipitor, Celebrex, Detrol, and Spiriva in select countries) and negative foreign currency translation.
On the other hand, Johnson & Johnson is growing strongly thanks to its high-margin pharmaceutical business and the stability of its consumer goods and medical device segments. Within pharmaceuticals, it's relying on cancer drug Imrbuvica and revolutionary new type 2 diabetes drug Invokana to drive its robust pharmaceutical profit margins over the next decade.
In other words, Pfizer may generate more FCF, but it's far from being the healthier company when comparing the two.
Source: Microsoft, Facebook.
Secondly, industry matters when it comes to generating huge cash flow. Some businesses are simply more cash-intensive than others, meaning large sums of FCF may simply not be possible. Chevron, for instance, is the only Dow stock with negative FCF in 2014, as it's struggled with weaker commodity prices in the wake of aggressive drilling expansion.
The flipside to this is a company like Microsoft, which brought in nearly $27 billion in FCF in 2014 -- good enough to be second-best within the Dow. Software developers have far fewer physical overhead costs, and deal primary with R&D as their major expense. Once a product is developed and priced, however, the gross margins can be astronomical. It also doesn't hurt that Microsoft possessed 91.7% of worldwide PC-based operating system market share as of July 2014 per TNW, giving the software developer incredible pricing power.
Lastly, and I really do think this deserves a category of its own, Apple is a monster! Apple's FCF generation of practically $50 billion is more than 13 of the lowest FCF Dow stocks did combined!
Source: Flickr user Jeyulio_.
Apple has an absolute stranglehold on brand loyalty in the U.S. when it comes to smartphones, and it's rapidly transforming itself into more than just a products company. The debut of wearable gadgetry with the Apple Watch, a mobile payment platform known as Apple Pay designed to personalize and protect financial data, and even an Apple Car which is expected to debut near the end of the decade, all display Apple's not-so-subtle transition from a product producer to platform play. Chances are highly likely it'll surpass $50 billion in FCF in fiscal 2015.
Keep this in mindIf you take away anything from this data (aside from how dominant Apple is), it's that while huge cash flow can be a good determinant of whether shareholder incentives are a possibility, it doesn't tell us enough about a company by itself for investors to make a buy or sell determination. In sum, investors still need to examine the long-term growth drivers of a business before investing, but they can certainly use FCF as a comparative tool within an industry to determine if a company may be worth more closely examining.
The article 10 Dow Stocks With Huge Cash Flow originally appeared on Fool.com.
Sean Williamsowns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool recommends Apple, Bank of America, Chevron, Cisco Systems, Johnson & Johnson, Verizon Communications, and Visa. The Motley Fool owns shares of Apple, Bank of America, ExxonMobil, General Electric Company, International Business Machines, Johnson & Johnson, and Visa. 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.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.