Seiya Tabuchi
When it comes to investing, one of the most important metrics I look at, regardless of whether the stock is a dividend stock or not, is free cash flow, or FCF.
Free cash flow is used to:
- Pay Dividends
- Buyback shares
- Make Acquisitions
- Pay down Debt
Today we are going to look at 3 companies that generate HUGE amounts of free cash flow, and all three happen to be dividend paying stocks. I often say, "Free Cash Flow is what makes the dividend Grow."
In today's article, we will analyze more than just free cash flows to see if these three stocks are trading at a cheap valuation.
3 Dividend Stocks With Huge Cash Flows
Cash Flow Stock #1 - Deere & Company (DE)
Deere & Company, formerly known as John Deere is an industrial company, but not just any industrial company. I have referred to Deere in the past as being the "Tesla of Agriculture" as they are a first mover when it comes to equipping their tractors with self-driving technology.
Deere & Company currently has a market cap of $108 billion. Over the past 12 months the stock is up 3%, but over the past 3 months Deere shares have retreated more than 15%.
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For three years straight now, not only has the company increased their net profit margins, but they are also the highest net profit margins the company has generated.
- 2020 Profit Margin: 7.7%
- 2021 Profit Margin: 13.5%
- 2022 Profit Margin: 13.6%
Revenues have risen in five out of the past six years, which have helped lead to solid profit margins. Rising profit margins are great, but what I care about even more as an investor is free cash flow, as I stated at the beginning. More and more tractors utilizing the new software should not only improve margins long-term but also improve free cash flow.
Here is a look at the company's free cash flow over the past three years.
- 2020 Free Cash Flow: $6.7 billion
- 2021 Free Cash Flow: $6.9 billion
- 2022 Free Cash Flow: $3.5 billion
So far, through the first three quarters of the company's fiscal 2023, Deere & Company has generated $2.0 billion.
Over the course of the trailing twelve months, DE has generated free cash flow of $5.8 billion. DE has 295.9 million shares outstanding, which translates to free cash flow per share of $19.43. Over the course of the last 12 months, the company has generated sales of $61.4 billion, which equates to revenue per share of $207.41 per share.
Using these figures, we can determine the company's free cash flow yield which shows what percentage of a company's revenue is turned into free cash flow. As such, Deere currently operates with a FCF yield of 9.4% over the past 12 months.
Deere pays an annual dividend of $5.40 per share which equates to a dividend yield of 1.4%. Using our free cash flow per share of $19.43, we can use this to determine the company's free cash flow payout ratio of 27.7%, leaving plenty of room for dividend growth. Speaking of dividend growth, DE has increased their dividend an average of 14.4% over the past five years.
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In terms of valuation, analysts are looking for 2024 earnings of $32.71 which equates to a forward price to earnings multiple of 11.5x, which is well below the company's 10-year average of 17x.
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Analysts are high on the stock with an average 12-month price target of $441 per share, implying 17.5% upside from current share prices.
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Cash Flow Company #2 - American Express (AXP)
American Express is a financial company, better known as a credit card company. American Express currently has a market cap of $104 billion. Over the past 12 months, the stock is flat, but as you can see from this chart, the company recently saw their stock fall 5% in one day and down nearly 20% in the past 3 months.
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So what happened with the financial credit card company you might be asking. The company released its Q3 earnings on this day which showed the following:
- EPS: $3.30 per share vs $2.94 per share expected
- Revenues: $15.38 billion vs $15.36 billion expected
AXP beat analyst expectations on both the top and bottom line. The company has reported six consecutive quarters of record revenue.
During the quarter, card members continued the trend of strong spending metrics, evidenced by global volumes being up 7% year over year. Spending by US consumer card users was up 9%.
The intrigue with American Express is the fact that they appeal to a much more affluent customer base, which is huge if you believe we are headed towards a potential recession. American Express has a total provision for credit losses of $1.23 billion, which was more than average analyst estimates of $1.19 billion, which suggests the company is either more concerned about a total recession or just being more conservative given the uncertainty moving forward. I think the combination of higher than expected provisions as well as just an overall bad day in the market with the 10-year treasury up weighed on the stock all together.
In terms of free cash flow, here is a look at how much AXP has generated in the past few years:
- 2020 Free Cash Flow: $4.1 billion
- 2021 Free Cash Flow: $13.1 billion
- 2022 Free Cash Flow: $19.2 billion
American Express has generated more than $10 billion in free cash flow through the first three quarters of the year. As of the end of 2022, AXP had free cash flow per share of $25.87 and revenue per share of $67.48. The company operates with a free cash flow yield of 38%, which is extremely strong.
AXP currently pays an annual dividend of $2.40 per share which equates to a dividend yield of 1.7%. The company has a five year annual dividend growth rate of 10%.
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In terms of safety, the dividend appears plenty safe at the moment with a free cash flow payout ratio of just 9.3%.
In terms of valuation, analysts are looking for 2024 earnings of $12.40 per share which equates to a forward price to earnings multiple of 11.4x, which is well below the company's 10-year average of 15.2x.
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Analysts are high on the stock with an average 12-month price target of $174, implying 23% upside from current share prices.
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Cash Flow Company #3 - AGCO Corporation (AGCO)
AGCO is a lesser known agriculture company, a competitor with Deere with some promising growth prospects. AGCO, although a competitor of Deere, they are a small competitor with a market cap of only $8.5 billion. Over the past 12 months, the stock has inched higher by 7%, but over the past three months the stock has fallen nearly 20%.
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In addition to owning well-respected tractor brands, the company is also looking to move in on Deere's growth opportunity when it comes to driverless tractors. The driverless technology being implemented is a growth angle for both of these agriculture plays I covered today.
Revenues have been climbing higher for the company in five out of six years, including 12 consecutive quarters of year over year revenue growth.
Here is a look at revenues by year:
- 2016 Revenue: $7.4 billion
- 2017 Revenue: $8.3 billion
- 2018 Revenue: $9.4 billion
- 2019 Revenue: $9.0 billion
- 2020 Revenue: $9.2 billion
- 2021 Revenue: $11.1 billion
- 2022 Revenue: $12.7 billion
As you can see, revenues have climbed 72% since 2016 and should continue climbing moving forward. Analysts are expecting revenues of $14.7 billion in 2023, which would equate to year over year revenue growth of more than 15%.
The company has generated the following free cash flow figures over the past three years:
- 2020 Free Cash Flow: $0.6 billion
- 2021 Free Cash Flow: $0.4 billion
- 2022 Free Cash Flow: $0.5 billion
AGCO is still gaining its footing in North America, but the company has some ambitious goals which could explode revenues leading to even higher free cash flow. Here is a look at some of the company's goals, one of which is the fact that they want to have fully autonomous solutions across crop cycle by 2030.
AGCO IR
AGCO currently pays an annual dividend of $1.16 per share which equates to a dividend yield of 1.0%. In May of 2023, AGCO management increased the dividend by 20% while also issuing a special $5.00 per share dividend as well. The company has used this approach for three years in a row, so if we include the $5.00 per share, AGCO actually has a dividend yield of 5.1%.
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In terms of valuation, analysts are looking for 2024 earnings of $14.99 per share which equates to a forward price to earnings multiple of just 7.5x, which is well below the company's 10-year average of 15.7x.
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In terms of price target, analysts have an average 12-month price target of $150, implying 33% upside from current levels.
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Investor Takeaway
Free cash flow makes the dividend grow. However, free cash flow is important even for non-dividend paying stocks because FCF is what is used to buy back shares, make strategic acquisitions, pay down additional debt, and pay a dividend if you have one.
A slim FCF yield does not give companies much wiggle room for errors, which is one reason I like to focus on strong FCF companies. The three companies we covered in today's piece are all generating solid FCF and those figures are expected to continue growing moving forward.
In addition to generating solid FCF, all three companies appear to be trading at great valuations as well.
In the comment section below, let me know which of these three stocks you like BEST.
Disclosure: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.
