Author Topic: Free cash flow investing  (Read 552 times)


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Free cash flow investing
« on: January 03, 2021, 07:01:46 AM »
So I'm hearing a lot of people say they know the market is crazy high, but there is no alternative. I have found it a useful exercise is to look at the Free cash flow of all the companies I own- just as I would with a rental property I have and calculate the FCF yield - after all this is what you are trying to do as an investor - get the largest stream of free cash flow into the future from the money you have now.
For example if you currently have an S&P 500 index fund the FCF yield for all of the companies averages out at approximately only 0.8%. (yikes)
The alternate approach is to look for companies that have high FCF yields and buy them instead. If you list all companies worldwide trading above 10% FCF yield, with at least $2bn in cash produced (so they arent small things), and high book value /price you get 9 companies.
The first and largest cash flow is BAT (ticker in US BTI) has FCF yield 13% looks a really cheap source of cashflow - but is unfortunately a tobacco company - so my wife wont let me buy it - someone will make a lot of money with this one - it just wont be me.
So removing the two tobacco cos from the list - the remaining 7 are Sogo Shosha - or Japanese trading companies, all yielding FCF above 10% - it isn't a surprise then that Buffett bought 5 of them for Berkshire in August.  You can think of them as almost mutual funds of businesses - irony being they own a lot of US companies too - so you are buying businesses in the US at less than 1/10 of the price of something that is in the S&P.  Itochu, Maurbeni, Mitsubishi, Mitsui and Sumitomo - are the Buffett ones - the other two on the FCF list that BRK didnt buy are Toyota Tsusho and Sojitz
They all have ADR's trading in the US if you are interested in buying them.