Investor Alert
Philip van Doorn

Deep Dive Archives | Email alerts

May 29, 2021, 11:17 a.m. EDT

Amazon and Facebook as defensive plays? Yes, along with these other stocks that are cash-flow winners

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    S&P 500 Index (SPX)
  • X
    Apple Inc. (AAPL)
  • X
    Amazon.com Inc. (AMZN)

or Cancel Already have a watchlist? Log In

By Philip van Doorn

If we’re heading into a time of increased risk in the stock market, investors might be well-served by owning shares of companies that not only generate a lot of cash, but also grow that money rapidly.

Below are two lists of large companies that have shown the highest free-cash-flow growth rates over the past three and five years.

A rapid pace of economic growth is generally a good thing for stock investors. But we’re in a period of unusually aggressive policies by the Federal Reserve to spur that growth. These policies have included a federal funds rate with a target range of zero to 0.25% and a continual increase in the central bank’s holdings of U.S. Treasury securities and mortgage-backed bonds. But with increasing inflation, the Fed may act sooner than previously expected to quell price increases — and that could lead to an uncertain period for stocks.

Read: Fed takes baby steps toward scaling back its bond purchases

Three-year cash-flow winners

Many professional investors emphasize cash flow when analyzing companies. Earnings can be a tough nut because there are so many one-time noncash items that can affect a company’s bottom line. A company can also book revenue while it is waiting to be paid — this means it shows a profit for selling something even though the cash hasn’t been received.

Berkshire Hathaway CEO Warren Buffett has explained the importance of cash flow in his annual letters to shareholders, including the 2020 letter , when he wrote that the company’s insurance businesses had an important industry advantage: “Overall, the insurance fleet operates with far more capital than is deployed by any of its competitors worldwide. That financial strength, coupled with the huge flow of cash Berkshire annually receives from its non-insurance businesses, allows our insurance companies to safely follow an equity-heavy investment strategy not feasible for the overwhelming majority of insurers.”

To identify large, stable companies growing their cash flow most quickly, we looked at free cash flow data provided by FactSet and compound annual growth rates (CAGR) for three and five years.

A company’s free cash flow is its remaining cash flow after planned capital expenditures. It is money that can be deployed to expand the business, make acquisitions, buy back shares, raise dividends or for other corporate purposes.

A blind focus on the highest free-cash-flow CAGR would have the problem of highlighting companies that had unusually low cash flows for the beginning period. So for the three-year free-cash-flow CAGR ranking we began with the 50 companies in the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.42% with the highest free cash flow for calendar 2017, and then ranked them by FCF CAGR for three years through 2020. We used calendar years because many companies have fiscal years that don’t match the calendar.

The largest company on the list of 50 was Apple Inc. /zigman2/quotes/202934861/composite AAPL +0.46% , which had $52.91 billion in free cash flow in calendar 2017. The company’s free cash flow increased to $80.22 billion in 2020, for a three-year CAGR of 14.9%. But Apple didn’t make the top 10 list for 2003 — it was ranked 14th. More about Apple below.

Here are the 10 S&P 500 companies from the list described above with the highest free-cash-flow CAGR for three years through 2020. The annual data is in millions of dollars:

You can scroll the table to see how each company’s free cash flow increased or declined over the past three years. The CAGR calculation only uses the 2020 and 2017 year-end numbers.

Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -0.84% was way out in front for three-year FCF CAGR through 2020 among the 50 companies in the S&P 500 with the highest FCF at the end of 2017. You can see below that it ranked second on the five-year list.

For three years, Verizon Communications Inc. /zigman2/quotes/204980236/composite VZ +0.47% ranked second, with CVS Health Corp. /zigman2/quotes/209664499/composite CVS -0.29% in third place.

CVS underlines the imperfection of any one-point stock screen. The company made the three- and five-year lists because of the increase in cash flow from its transformative acquisition of Aetna in November 2018. After a few more years, it will be interesting to see how rapidly the combined company is able to grow its cash flow from a 2019 baseline.

After the five-year list, there are more comments about companies that made the top 10 for both periods.

+18.51 +0.42%
Volume: 2.01B
July 29, 2021 5:13p
US : U.S.: Nasdaq
$ 145.64
+0.66 +0.46%
Volume: 56.49M
July 29, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$2419.37 billion
Rev. per Employee
US : U.S.: Nasdaq
$ 3,599.92
-30.40 -0.84%
Volume: 5.32M
July 29, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$1830.86 billion
Rev. per Employee
$ 55.98
+0.26 +0.47%
Volume: 12.83M
July 29, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$230.69 billion
Rev. per Employee
$ 83.06
-0.24 -0.29%
Volume: 4.28M
July 29, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$109.67 billion
Rev. per Employee
1 2
This Story has 0 Comments
Be the first to comment
More News In

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.