The Essence Of The 'New' Modern Corporation: Free Cash Flow

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Includes: AAPL, AMZN, FB, GOOG, GOOGL, NFLX
by: John M. Mason

Summary

The "new" Modern Corporation lives off of "intangibles," like intellectual property, and financial engineering.

The source of the "new" Modern Corporation has been the big "High Tech" firms, the major ones being labeled the FAANGs, made up of Facebook, Apple, Amazon, Netflix and Alphabet(Google).

But, now the model of the "new" Modern Corporation seems to be spreading to other industries as corporations move on to the "new" model of corporate behavior.

A small piece in the Financial Times captures the essence of the “new” Modern Corporation that I have been writing about recently.

The “new” Modern Corporation lives off of “intangibles” like intellectual property and financial engineering.

The driving force behind the “new” Modern Corporation has been the world of information technology, exemplified by the FAANGs, a group made up of Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL).

Now, others seem to have latched onto the ideas that drive the FAANGs and have incorporated this emphasis upon intangibles and financial engineering into their operational skills. And, the result has been truly remarkable.

As a result, we now have something called the Wabua, the five leading generators of revenues in the S&P 500 and include Walmart, Apple, Berkshire Hathaway, UnitedHealth Group, and Amazon. Analysts at Oppenheimer Funds coined the name Wabua.

“Oppenheimer says an equally weighted portfolio of the FAANGs produces a free cash flow yield…or the percentage of shareholder equity that companies earn in free cash…that is less than half of that generated by companies under the Wabua banner.”

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This performance needs to be put in perspective given the Faangs’ massive rise in value and dominant leadership of recent years. That is, maybe these other companies that are now acting more like “new” Modern Corporations, need to be valued more like the FAANGs have been valued.

Description: https://www.ft.com/__origami/service/image/v2/images/raw/http%3A%2F%2Fcom.ft.imagepublish.upp-prod-us.s3.amazonaws.com%2Fbe28854a-bc16-11e8-8274-55b72926558f?source=next&fit=scale-down&quality=highest&width=700

Just one other comment on these “new” Modern Corporations today. One of the obvious characteristics of the “new” Modern Corporation is that they don’t really have to worry about financing themselves.

Yes, they can go to the financial markets and raise debt almost any time they want it…say to lock up historically low interest rates.

But, they can engage in stock buybacks and cash dividend payments at their call.

Furthermore, investment in physical capital is no problem because they have the cash…or, market access…to time their physical capital investment to their own needs and are not dependent upon any governmental policy…whether fiscal or monetary…that might be initiated.

In other words, the ability to generate such large net cash flows, the “new” Modern Corporation is set free of any particular effort that might be made by the federal government to stimulate or contain the economy.

What does a “new” Modern Corporation do with the tax cuts received from the December 2017 tax reform act? Well, since it is able to satisfy all its needs with respect to physical capital investment, it directs the money to shareholders through stock buybacks.

Welcome to the “new” era of corporate finance.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.