Investing is not just about placing capital – it’s about investing in the future of a company. Our focus is on long-term, cash-generating stocks that provide us with a stable and growing income stream. In this article, we’d like to explain the process we use to identify companies that have the ability to grow revenues and free cash flow, pay dividends, and fund share buybacks from their own cash flow.
1. Growing Revenues: An Indicator of Long-Term Success
A company that consistently grows its revenues is usually a sign of a solid business model and a strong market position. We look for companies whose revenue growth is not just short-term, but sustained over the long haul. Steady revenue growth is often the result of strong product or service demand, as well as effective market strategies.
2. Growing Free Cash Flow: The Foundation for Investments and Dividends
A company’s free cash flow (FCF) provides valuable insights into its financial health. Free cash flow is the money left over after a company has paid its operating expenses and investments – and it’s the capital available for dividends, buybacks, and reinvestment. We focus on companies whose free cash flow is not only stable but also growing over time. A high and growing free cash flow indicates that a company is financially flexible and capable of meeting its obligations.
3. Dividends from Free Cash Flow: A Sign of Financial Stability
The ability to pay dividends is an important feature of a solid investment. But not all dividends are created equal. It’s crucial for us that dividends come from a company’s free cash flow, rather than from debt or one-time effects. Dividends from stable cash flows not only provide a reliable income stream but also signal the company’s confidence in its long-term profitability. We prefer companies that have demonstrated consistent dividend growth over the years.
4. Share Buybacks from Free Cash Flow: A Sign of Confidence and Capital Efficiency
Another indicator of a company’s financial strength is its share buyback program. Companies that regularly repurchase shares and fund these buybacks from their free cash flow show that they are investing in their own future and wish to support the market value of their stock without relying on additional debt. Share buybacks from free cash flow can increase earnings per share and optimize the capital structure. On the other hand, buybacks financed through debt can signal financial risk, as it may indicate that a company is using borrowed money to prop up its stock price, which could increase the overall risk for investors.
5. Long-Term Focus: Patience as the Key to Success
Our investment process is based on a long-term horizon. We’re not looking for short-term profits, but for companies that can generate stable cash flows over many years. Patience is key – we only invest in companies that we believe will remain successful, sustainable business models in the coming decades. During turbulent times, we remain calm and stay focused on our long-term goals.
Conclusion about our process to find long-term cash-generating stocks
The process of finding long-term, cash-generating stocks is a thorough one, based on solid financial metrics and a deep understanding of business models. By focusing on growing revenues, increasing free cash flow, stable dividends, and share buybacks funded from free cash flow, we can identify companies with the potential to build a strong and growing portfolio over the years. Patience and discipline are just as important as thorough analysis – and that’s the core of our investment process.
You want to find great dividend stocks for your portfolio? We have you covered! Look at our dividend Watchlist to get some ideas of free cashflow machines.
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