3 mega-cap stocks with incredibly strong free cash flow

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Stock research can sometimes be difficult, especially with thousands of options available. However, a common metric that investors like to focus on is free cash flow.

But what is free cash flow?

Simply put, free cash flow is the total cash held by a business after paying operating costs and capital expenditures.

Free cash flow says a lot about a company’s financial health, but how?

High free cash flow provides more growth opportunities, higher potential for stock buybacks, stable dividend payouts, and the ability to easily write off any debt.

It’s easy to see why this is such a vital measure.

Typically, companies with strong free cash flow are well-established and have very successful business operations, no doubt benefits that any investor seeks.

Three S&P 500 companies – Pfizer PFE, Apple AAPL and Alphabet GOOGL – all have incredibly high free cash flow.

Below is a year-to-date chart illustrating the performance of the three companies’ stocks in 2022, with the integrated S&P 500 as a benchmark.

Image source: Zacks Investment Research

Let’s take a deeper dive into each business.

Pfizer

In its latest quarterly release, Pfizer’s quarterly free cash flow was $7.4 billion, marking a strong 26% sequential increase.

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Image source: Zacks Investment Research

In addition to inspiring free cash flow, Pfizer shares could be considered undervalued, further displayed by its Style Score of an A for Value.

PFE is posting a cheap forward P/E ratio of 7.1X, a far cry from its five-year median of 12.7X, representing a staggering 67% discount to its medical sector Zacks.

Zacks Investment Research
Image source: Zacks Investment Research

In addition, the company has a robust growth profile – earnings are expected to climb double digits by 50% in FY22. And the company’s top line is also in excellent health, with revenue growing are expected to climb 24% in FY22.

Who doesn’t like getting paid? Fortunately, Pfizer is more than dedicated to rewarding its shareholders — the company’s annual dividend yields 3.5%, well above its 1.5% average for the Zacks sector.

Undoubtedly impressive, the company has increased its dividend payout fivefold over the past five years, coupled with a five-year annualized dividend growth rate of a notable 4.8%.

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Image source: Zacks Investment Research

Pfizer has consistently surprised investors, beating revenue and net income estimates in five of its past seven quarters.

Apple

Apple is the undisputed free cash flow heavyweight champion – AAPL reported the highest quarterly free cash flow of any S&P 500 company in the second quarter.

The tech titan’s free cash flow was reported at a stellar $20.8 billion, good enough for a solid 9.4% increase from the quarterly free cash flow of $19 billion it a year ago.

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Image source: Zacks Investment Research

Apple shares could be interpreted as a bit expensive, with its forward earnings multiple of 25.4X above its five-year median of 22.8X and representing a 14% premium to its IT and technology sector Zacks.

Still, the value is a fraction of the 2020 highs of 41.5X.

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Image source: Zacks Investment Research

Steady growth is the name of the game for Apple, and the estimates allude to precisely that; earnings are expected to climb 9% in FY22 and another 7% in FY23.

Early estimates paint an equally positive story, with revenue expected to climb 7% in FY22 and another 5% in FY23.

Zacks Investment Research
Image source: Zacks Investment Research

Apple has a strong earnings track record, beating revenue and earnings estimates in nine of its previous ten quarters.

Alphabet

Alphabet came in strong in its latest release, announcing quarterly free cash flow of $12.6 billion, the fourth highest of any S&P 500 company in the second quarter.

Zacks Investment Research
Image source: Zacks Investment Research

Alphabet’s valuation levels could seriously attract long-term investors; The company’s 20.2X forward price-to-earnings ratio is a far cry from its five-year median of 26.8X and represents an attractive 10% discount to its Zacks sector.

Zacks Investment Research
Image source: Zacks Investment Research

GOOGL’s net income is expected to decline 7% in FY22. However, the earnings picture shifts into high gear in FY23, with Zacks’ consensus EPS estimate of 5 $.79 suggesting annual net income growth of 11%.

The company’s revenue is in commendable shape – revenue is expected to grow by Y/Y double digit percentages during FY22 and FY23.

Zacks Investment Research
Image source: Zacks Investment Research

Alphabet missed EPS and revenue expectations in its past two quarters, citing a difficult trading environment. Prior to these back-to-back failures, GOOGL has exceeded revenue and profit estimates for seven consecutive quarters.

Conclusion

Targeting stocks with free cash flow is a great way to find well-established companies with a track record of successful trading.

In addition to strong free cash flow, the three companies above have strong growth prospects, large market capitalizations and a history of beating quarterly estimates.

For investors looking for companies brimming with cash, Apple AAPL, Pfizer PFE and Alphabet GOOGL would fit the parameters nicely.

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Apple Inc. (AAPL): Free Inventory Analysis Report

Pfizer Inc. (PFE): Free Inventory Analysis Report

Alphabet Inc. (GOOGL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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