PotlatchDeltic Corporation (NASDAQ:PCH) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine PCH’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
What is PotlatchDeltic’s cash yield?
PotlatchDeltic’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for PotlatchDeltic to continue to grow, or at least, maintain its current operations.
The two ways to assess whether PotlatchDeltic’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
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
Although, PotlatchDeltic generate sufficient cash from its operational activities, its FCF yield of 5.6% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does PotlatchDeltic have a favourable cash flow trend?
Does PCH’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 17%, ramping up from its current levels of US$179m to US$210m in two years’ time. Furthermore, breaking down growth into a year on year basis, PCH is able to increase its growth rate each year, from -0.9% next year, to 18% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
PotlatchDeltic is compensating investors at a cash yield similar to the wider market portfolio. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research PotlatchDeltic to get a more holistic view of the company by looking at:
- Valuation: What is PCH 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 PCH 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 PotlatchDeltic’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.
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