A company that is regularly generating strong free cash flow (FCF) can use profits from its business operations to develop new products, pay down debts, or return cash to shareholders in the form of dividends or buybacks. So, while it’s not unusual to see young companies post impressive stock gains despite the businesses not yet being profitable, it should come as no surprise that FCF performance tends to have a strong correlation with shareholder returns over the long term.
Investors with a buy-to-hold mindset can look at free-cash-flow histories and trends as a way to home in on stocks that are worth owning for the long haul. With that in mind, Apple (NASDAQ:AAPL), Disney (NYSE:DIS), and AT&T (NYSE:T) are three companies that produce impressive cash flows, return income to shareholders, and trade at non-prohibitive valuations — characteristics that suggest they could be winners for your portfolio.
Apple’s standout brand strength in the consumer technology hardware space has allowed it to command impressive price premiums and capture the lion’s share of profits in the smartphone space. A recent slowdown for the company’s handset line has dampened the company’s near-term outlook, but Apple’s business continues to be strong, and there’s still substantial long-term upside with the stock trading at roughly 16 times this year’s expected earnings.
Even with iPhone sales declining, strong growth for Apple’s high-margin services segment lessened the blow in 2018. Momentum for services and other areas of the business combined with ongoing share buybacks to help drive the company’s per-share free cash flow up roughly 19% last year.
Apple’s stellar cash flow has allowed it to build up a massive war chest with roughly $130 billion in cash net of debt, even after big share repurchasing pushes. While unevenness for the handset business will likely put a damper on FCF growth in the near term, it’s possible that iPhone sales can be reenergized with the introduction of 5G and other more substantial feature upgrades. The company is also still scratching the surface of…
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