Free cash flow can be an indicator of a company’s fundamental value, and it’s one of our 10 Principles of Value Investing™. After paying off all expenses and capital expenditures, companies can use the remaining free cash flow to make acquisitions, develop new products, or potentially return profits to shareholders. All of these activities can enhance a stock’s value.
Stocks in the S&P 500 Index generated a free cash flow yield of 6.7% as of 9/30/13. In contrast, the 10-year Treasury was yielding 2.6%, and money markets were near 0*.
We believe stocks today are attractive because of this comparatively high yield and appreciation potential.
Free Cash Flow Yield of the S&P 500 vs. 10-Year Treasury
Source: Oppenheimer & Co. Inc., Bloomberg and Standard & Poor's, 9/30/2003 to 9/30/2013
FCF is free cash flow.
Past performance does not guarantee future results.