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Public Service Enterprise Group Incorporated (NYSE:PEG): Cash Is King

Simply Wall St

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Public Service Enterprise Group Incorporated (NYSE:PEG) 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 PEG’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.

Check out our latest analysis for Public Service Enterprise Group

What is Public Service Enterprise Group's cash yield?

Public Service Enterprise Group 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 Public Service Enterprise Group’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

After accounting for capital expenses required to run the business, Public Service Enterprise Group is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!

NYSE:PEG Balance Sheet Net Worth, April 5th 2019

Is Public Service Enterprise Group's yield sustainable?

Does Public Service Enterprise Group’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 going forward. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 28%, ramping up from its current levels of US$2.9b to US$3.7b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, PEG's operating cash flow growth is expected to decline from a rate of 14% in the upcoming year, to 6.9% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

Now you know to keep cash flows in mind, I suggest you continue to research Public Service Enterprise Group to get a more holistic view of the company by looking at:

  1. Valuation: What is PEG 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 PEG is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Public Service Enterprise Group’s board and the CEO’s back ground.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.