If you plan to allocate any new money to stocks, I suggest honing in on companies that generate great gobs of free cash flow — what’s left of a company’s profits after adding back depreciation allowances and subtracting capital spending. History shows that businesses with a large amount of free cash flow per share, relative to their stock price, tend to outperform the market indexes over the long haul.
In addition, I’m especially fond of hefty cash generators right now because these are the companies that enjoy the financial muscle to raise dividends and/or buy back stock. If we really do get a tax shock next January, the cash-flow kings will be able to react immediately to protect their shareholders.
My No. 1 cash-flow pick at the moment is a leading name in managed health care, Wellpoint (NYSE:WLP). Parent of various Anthem/Blue Cross organizations across the country, WLP serves 34 million members in its affiliated health plans and a total of 65 million individuals through its subsidiaries.
Last year, WLP began issuing a quarterly dividend. The payout still is fairly modest, amounting to a yield of 1.7%. However, the company’s operations are churning out so much cash that I expect dividends to grow at close to a double-digit pace for the next five years or more.
Equally appealing, WLP’s low share price (a little over 8 times estimated 2012 earnings) has prompted management to embark on an aggressive buyback program. I expect WLP to retire about $2.5 billion of stock this year — almost 11% of the company’s total market value.
What about President Barack Obama’s new health care law? Whatever else the law does, it cements the position of private insurers like WLP at the heart of the system. The mass of regulations may, in effect, transform health insurers into public utilities. But they’ll still be highly profitable businesses — and if we buy them cheap, we’ll score big gains, too.