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3 Mega-Cap Stocks With Unbelievably Strong Free Cash Flow

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Scouting for stocks can be challenging at times, especially with thousands of options out there. However, one common metric investors love to focus on is free cash flow.

But what is free cash flow?

Simply put, free cash flow is the total cash a company holds onto after paying for operating costs and capital expenditures.

Free cash flow speaks volumes about a company’s financial health, but in what way?

A high free cash flow allows for more growth opportunities, a higher potential for share buybacks, stable dividend payouts, and the ability to wipe out any debt with ease.

It’s easy to see why it’s such a vital metric.

Generally, companies that display free cash flow strength are well-established and carry highly-successful business operations, undoubtedly perks that any investor looks for.

Three companies within the S&P 500 – Pfizer (PFE - Free Report) , Apple (AAPL - Free Report) , and Alphabet (GOOGL - Free Report) – all carry unbelievably strong free cash flow.

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

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Image Source: Zacks Investment Research

Let’s take a deeper dive into each company.

Pfizer

In its latest quarterly print, Pfizer’s quarterly free cash flow came in at a rock-solid $7.4 billion, penciling in a steep 26% sequential increase.

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Image Source: Zacks Investment Research

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

PFE carries a cheap 7.1X forward P/E ratio, nowhere near its five-year median of 12.7X, representing a staggering 67% discount relative to its Zacks Medical Sector.

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Image Source: Zacks Investment Research

Further, the company carries a robust growth profile – earnings are forecasted to soar a double-digit 50% in FY22. And the company’s top line is also in exceptional health, with revenue forecasted to climb 24% in FY22.

Who doesn’t love getting paid? Fortunately, Pfizer is more than dedicated to rewarding its shareholders – the company’s annual dividend yields a steep 3.5%, well above its Zacks Sector average of 1.5%.

Undoubtedly impressive, the company has upped its dividend payout five times over the last five years, paired 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, exceeding top and bottom line estimates in five of its last seven quarters.

Apple

Apple is the undisputed heavyweight champion of free cash flow – AAPL reported the highest quarterly free cash flow of any S&P 500 company in Q2.

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

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Image Source: Zacks Investment Research

Apple shares could be interpreted as a bit expensive, with its 25.4X forward earnings multiple sitting above its five-year median of 22.8X and representing a 14% premium relative to its Zacks Computer & Technology Sector.

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

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Image Source: Zacks Investment Research

Consistent growth is the name of the game for Apple, and estimates allude to precisely that; earnings are forecasted to climb 9% in FY22 and a further 7% in FY23.

Top line estimates paint a similarly positive story, with revenue projected to climb 7% in FY22 and an additional 5% in FY23.

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Image Source: Zacks Investment Research

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

Alphabet

Alphabet came in hot in its latest print, reporting quarterly free cash flow of $12.6 billion, the fourth highest of any S&P 500 company in Q2.

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Image Source: Zacks Investment Research

Alphabet’s valuation levels could seriously entice long-term investors; the company’s 20.2X forward P/E ratio is nowhere near its five-year median of 26.8X and represents an attractive 10% discount relative to its Zacks Sector.

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Image Source: Zacks Investment Research

GOOGL’s bottom line is forecasted to decline by 7% in FY22. However, the earnings picture kicks back into high gear in FY23, with the Zacks Consensus EPS Estimate of $5.79 suggesting Y/Y bottom line growth of a double-digit 11%.

The company’s top line is in commendable shape – revenue is forecasted to grow by double-digit percentages Y/Y in FY22 and FY23.

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Image Source: Zacks Investment Research

Alphabet has missed EPS and revenue expectations in its last two quarters, citing a challenging business environment. Prior to these back-to-back misses, GOOGL exceeded revenue and earnings estimates for seven consecutive quarters.

Bottom Line

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

In addition to free cash flow strength, all three companies above carry solid growth prospects, have steep market capitalizations, and a history of exceeding quarterly estimates.

For investors seeking companies overflowing with cash, Apple (AAPL - Free Report) , Pfizer (PFE - Free Report) , and Alphabet (GOOGL - Free Report) would all precisely fit the parameters.


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