If you are currently a shareholder in Deutsche Post AG (ETR:DPW), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the air freight and logistics industry, DPW is currently valued at €37.11b. I will take you through DPW’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
Is Deutsche Post generating enough cash?
Deutsche Post generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of Deutsche Post’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Deutsche Post also generates a positive free cash flow. However, the yield of 3.06% is not sufficient to compensate for the level of risk investors are taking on. This is because Deutsche Post’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for Deutsche Post?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at DPW’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 51.55%, ramping up from its current levels of €4.20b to €6.37b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, DPW’s operating cash flow growth is expected to decline from a rate of 19.70% in the upcoming year, to 15.64% by the end of the third year. But the overall future outlook seems buoyant if DPW can maintain its levels of capital expenditure as well.
Given a low free cash flow yield, on the basis of cash, Deutsche Post becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. Now you know to keep cash flows in mind, I suggest you continue to research Deutsche Post to get a more holistic view of the company by looking at:
- Valuation: What is DPW worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DPW is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Deutsche Post’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.