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Strategies & Market Trends : Value Investing
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To: 49erfan09 who wrote (39412)9/27/2010 10:02:05 AM
From: Spekulatius  Read Replies (2) of 78670
 
Free cash flow - FCF. My current take is that FCF is less important for investment success then I thought a few years ago.

My observation is that companies with a high FCF ( meaning they generate more funds than they can reinvest in their business) often tend to put this money at work where it does not seem to benefit shareholders. Examples are HPQ (which i own) with their skimpy dividend and their bidding wars with 3PAR.

There are sectors that would fail and FCF screen and still do well - utilities being one example (they outperformed the SP500 for many years). Utilities mostly pay dividends and reinvest in their own business, sometime incurring debt to do so. This is a very straightforward business. Mergers do happen but they are typically fully paid in stock and only pay modest premiums. Utilities only got into trouble when they followed Enron into their "asset light" business model and energy trading.

Other sectors that have been doing well are mining and energy. In both business, the companies tend to reinvest most cash flow in their business and into hard assets. However if you compare companies within the same industry group, those that generate FCF are preferable to those that do not, everything else being equal (which is mostly not case).
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