U.S. markets closed
  • S&P Futures

    -13.50 (-0.31%)
  • Dow Futures

    -147.00 (-0.43%)
  • Nasdaq Futures

    -20.50 (-0.13%)
  • Russell 2000 Futures

    -8.20 (-0.37%)
  • Crude Oil

    -0.35 (-0.49%)
  • Gold

    +1.10 (+0.06%)
  • Silver

    -0.01 (-0.05%)

    -0.0007 (-0.06%)
  • 10-Yr Bond

    +0.0390 (+2.93%)
  • Vix

    +2.12 (+11.34%)

    -0.0020 (-0.14%)

    +0.0850 (+0.08%)

    -625.94 (-1.31%)
  • CMC Crypto 200

    -46.10 (-3.76%)
  • FTSE 100

    -63.84 (-0.91%)
  • Nikkei 225

    +176.75 (+0.58%)

What Are 'Cash Cow' Companies and Why Do They Make Great Stocks?

Why do investors like to see companies that have strong free cash flow yields? Find out why this could be an important metric for investors to watch in this edition of the Dutram Report!
This content is not available due to your privacy preferences.
Update your settings here to see it.
  • (0:45) - Cash Cow Investing Strategy

  • (2:45) - How To Find Companies With Good Cash Flow Yields

  • (5:00) - Is This Strategy A Replacement For Income Investing?

  • (6:30) - Examples of Classic Cash Cows: Boeing and Oracle

  • (8:40) - Pacer ETFs: COWZ Overview

  • (10:50) - CALF ETF: Small Cap Approach

  • (12:30) - Sector Breakdown for CALF and COWZ

  • (14:00) - International Exposure With Cash Cow ETFs: GCOW and ICOW

  • (18:45) - Episode Roundup: Podcast@Zacks.com

When analyzing a business, it is often said that ‘cash is king’, as it is hard to overstate the importance of cash flow to a healthy business operation.

Due to this, some investors like to focus on companies that are doing a great job of generating excess cash flows. These kinds of companies have plenty of leeway to do all sorts of key business activities, including stock buybacks, dividend payments, or mergers and acquisitions. Having this level of freedom is a very valuable thing for a business, and you can see why these types of companies might make for intriguing stocks as well.

For more insights on this topic, I recently spoke with Sean O’Hara, the President of Pacer ETF Distributors for this week’s edition of the Dutram Report. Pacer has a lineup of cash cow-focused ETFs, so he definitely recognizes the importance of watching this metric when it comes to investing.

Way to Look at Free Cash Flow & Cash Cow Companies

Pacer doesn’t just focus on free cash flow though, as the company looks at free cash flow yield as one of the most important metrics. This ensures that you aren’t just getting the largest companies which are producing the most free cash flow, but those that are generating cash in a robust way when compared to their enterprise values.

While this might sound a little intimidating, remember that the idea is to find companies that are producing robust cash levels and have plenty of options for their business at their disposal. Sean and I also discuss some ‘classic’ cash cow companies, and they are some big names that you have definitely heard of, including Boeing (BA) and Oracle (ORCL) to name a few. We discuss how these two have become such great examples of cash cows, and why companies like these end up being such solid investments.

ETF Approach

Pacer’s focus goes beyond a company or two in this market, as they have four cash cow ETFs that have market-crushing free cash flow levels. For their flagship product, the Pacer US Cash Cows 100 ETF (COWZ), this results in a free cash flow yield for the index of close to 8.5%. This compares very favorably to what we see for something that tracks the Russell 1000, such as IWB, as the free cash flow yield there is just 3.6%.

This tilt towards free cash flow also helps with a few other key value metrics, namely PE and dividend growth. COWZ ends up having a higher three-year dividend growth when compared to the Russell 1000 index, while the PE is just 13.4, a huge discount from the 22.7 we see for the benchmark, so value investors might find something to like in this approach as well.

Sean also walks us through why this strategy results in more of a value-focus, and how the approach plays out for the small cap world with their US Small Cap Cash Cows 100 ETF (CALF). In the small cap market, this has an even more dramatic impact on some value metrics, though we also talk about the sector concentration that results from this technique too.

Finally, we also discuss how this strategy works in the international market, specifically with the company’s Developed Markets International Cash Cows 100 ETF (ICOW) and its Global Cash Cows Dividend ETF (GCOW). Sean talks about the key differences between these two, as well as how a cash cow-focused approach holds up across the globe. But check out the podcast for more of Sean’s insights, and other key factors to know about cash cow companies!

Bottom Line

But what do you think about cash cow companies? Make sure to write us in at podcast @ zacks.com or find me on Twitter @EricDutram to give us your thoughts on this, or anything else in the fund market.

But for more news and discussion regarding the world of investing, make sure to be on the lookout for the next edition of the Dutram Report (each and every Thursday!) and check out the many other great Zacks podcasts as well!

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Boeing Company (The) (BA) : Free Stock Analysis Report
Oracle Corporation (ORCL) : Free Stock Analysis Report
PACR-US CC100 (COWZ): ETF Research Reports
ISHARS-RS 1K (IWB): ETF Research Reports
PACR-GL CC DIV (GCOW): ETF Research Reports
PACR-US SC CC1 (CALF): ETF Research Reports
PACR-DMI CC1 (ICOW): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research