Stocks with High Free Cash Flow Yield: There’s a lot of information available on a company’s financial reports. The Income Statement and the Balance Sheet tend to get the most attention, but neglecting the Cash Flow Statement is a mistake.
While you can calculate a wide variety of useful ratios from the first two financial statements, the Cash Flow Statement might offer the most compelling data on the company’s true financial health. Stocks with high free cash flow yield have a lot to offer investors. Here’s why.
What You Can Learn from Free Cash Flow
From a financial perspective, a business has a lot in common with individual households. You need income to ensure bills are covered, and ideally, there is cash left over in case of an unexpected expense.
When you don’t have the cash you need to cover a small emergency, there is a problem – even if all of your debts are paid. If you can’t get the cash together to fully cover your debts, you have an even bigger problem. The same goes for businesses.
The most important point to remember is that the Cash Flow Statement is different from the Income Statement. While a company might appear to be in good financial shape based on the Income Statement, the Cash Flow Statement can show an entirely different situation.
Calculation of income includes all sorts of components, including future income that is not yet in hand. That’s not helpful from a cash flow perspective because future income doesn’t cover debts coming due now.
Lots of cash means bills get paid, and the company can afford to grow and expand without going into debt. From a shareholder perspective, high free cash flow ensures the company can sustain dividends, pursue share buybacks, and otherwise reinvest in the business.
Calculating Free Cash Flow Yield
Financial ratios make it easier to compare one stock to another. For the purpose of measuring cash flow, analysts rely on the Free Cash Flow Yield – much as they look at the price-to-earnings ratio (P/E) to better understand a company’s valuation.
Free Cash Flow Yield is calculated by dividing the free cash flow figure by the total value of the company (e.g., market cap). While there is no hard and fast rule that states what is considered an acceptable, good, or exceptional Free Cash Flow Yield, generally speaking, anything under four percent is cause for concern.
These three stocks with high free cash flow yield have the potential to be valuable additions to your portfolio.
Grupo Bimbo S.A.B. de C.V (GRBMF)
Mexico’s Grupo Bimbo is a multinational conglomerate of more than 100 brands. While those brands offer a wide range of bakery items, the most basic – and most popular – is bread.
Grupo Bimbo has a presence in 33 countries, including the United States and parts of Europe, Asia, Africa, and South America. It boasts annual sales of more than $15 billion, and it has been honored among the World’s Most Ethical Companies five times – most recently in 2021.
By nearly every measure, Grupo Bimbo is severely undervalued. Stock prices are quite low as compared to the company’s growth. It’s worth noting that Grupo Bimbo is well-positioned from a Free Cash Flow Yield perspective – at the moment, that figure is an impressive 16.54 percent.
LSI Industries (LYTS)
LSI Industries designs and manufactures a product that rarely catches consumers’ attention: lighting. Despite the fact that there is lighting in just about every indoor and outdoor space, it goes unnoticed unless it is absent.
LSI Industries is a top choice for engineers, contractors, and architects, because its line of innovative and functional lighting solutions can be adapted for virtually any location.
You can find LSI fixtures in sports complexes, grocery stores, and parking structures throughout North America, and that’s not all. The company is deeply involved in new lines of digital signs and menu boards that are rapidly replacing the older, low-tech versions.
Investors and analysts don’t spend a lot of time talking about LSI Industries, but perhaps they should.
When comparing Free Cash Flow Yield between LSI Industries and its competitors, this company is clearly doing something right.
As of late May 2021, LSI Industries has a Free Cash Flow Yield of 15.54 percent. That’s a good sign that shareholders can count on this company to continue growing while simultaneously delivering returns on their investment.
Hollysys Automation Technologies (HOLI)
Hollysys Automation Technologies is based in the Asia Pacific region. Its area of focus is Mechanical & Electrical Solutions (M&E), Railway Transport Automation, and Industrial Automation.
This technology contributes to the reliability and performance of thermal power plants, oil refineries, nuclear power plants, and high-speed railways, along with smaller facilities like factories, data centers, hospitals, airfields, and commercial buildings.
This may be another “invisible” technology that only gets attention when something goes wrong, but that’s okay with Hollysys. The company is a leader in the industry among its Asian-Pacific competitors, and it has the strong financials to prove it.
Among other financial data, Hollysys has a Free Cash Flow Yield of 14.37 percent. That ensures the flexibility it needs to continue development activities which will ultimately lead to technological improvements and expansion into new markets.
Free Cash Flow Yield: The Bottom Line
In most cases, analysts don’t shine a spotlight on Free Cash Flow Yield unless it is exceptionally low. However, some investors consider this figure more important to their personal research than more common ratios like price-to-earnings.
High Free Cash Flow Yield demonstrates that a company is adept at handling its cash, and more importantly, the company can survive any unexpected economic challenges. It increases the likelihood that dividends can be sustained, and it makes growth and expansion possible.
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