Cash cow companies provide consistent cash flows and can help strengthen core investment allocations.
In the upcoming webcast Cash Cows: A simple one Pacer ETFs Strategy for Complex Markets, Sean O’Hara, President of Pacer ETFs Distributors, will highlight the benefits of cash cow stocks and how they can improve financial advisor client portfolios.
In particular, investors interested in the free cash flow metric have several options to choose from. For example the Pacer Global Cash Cows Dividend ETF (GCOW)the Pacer US Cash Cows 100 ETF (COWZ)and the Pacer US Small Cap Cash Cows 100 ETF (KALF) all implement free cash flow yield screening to narrow their investment universes.
Focusing on companies with steady free cash flow may be a better approach to security selection than alternatives. Free cash flow is the money that’s left after a company pays for expenses, interest, taxes, and long-term investments. It is used to buy back stock, pay dividends, or participate in mergers and acquisitions. The ability to generate a high free cash flow yield indicates that a company is producing more cash than it needs to operate, which can then be invested in growth opportunities.
Free cash flow companies generally have three distinguishing characteristics – they are productive, reliable and self-sufficient. Companies generate more cash flow than they spend, allowing them to grow without external financing. Free cash flow is a robust measure of profitability that, unlike earnings, is not subject to manipulation and accounting assumptions. Finally, because companies rely less on the capital markets for funding, they do not dilute their issued company shares.
“To better identify strong, healthy dividend payers, investors should look to FCF as a guide to a company’s strength and ability to pay dividends. Because companies pay dividends with their cash, companies with high free cash flow are best positioned to pay dividends,” said Pacer ETFs.
“By accessing dividends through FCF yield, you potentially gain exposure to companies with higher FCF, lower P/E and lower payout ratios that can support a higher dividend. This combination has resulted in significant outperformance versus other dividend peers, supported by stronger fundamental performance.”
Free cash flow companies can also be more durable in the current phase of heightened inflationary pressures.
“Without the backdrop of a recession and falling profits, corporate cash flows tend to match or even outperform inflation. This is especially true when inflation rises and companies pass higher costs on to customers. An example is the “great inflation” period of the 1970s, when companies’ net cash flows grew faster than inflation. In such a scenario, long-term investors should consider equities as a store of value to protect against inflation,” said Pacer ETFs.
Financial advisors interested in learning more about the cash cows strategy can register for the webcast on Thursday, October 20 here.