Cash Is King - Part II

In Part I of this feature, I looked at some of the strengths and weaknesses of the price/cashflow (PCF) ratio.

In this article I'll take a look at three attractive Footsie shares with low PCF ratios. Before I go any further, here's a table of the 20 shares in the FTSE-100 with the lowest PCF ratios.

Out of those twenty, here are the three shares that caught my eye:

Rexam

Rexam is the world's leading beverage can manufacturer and makes more than 50bn cans each year. It also has a strong presence in glass and plastic packaging.

Rexam is certainly cash generative. Last year free cash flow came in at £248m, so it's no surprise that the company trades on an attractive PCF ratio of 7.19. That looks reasonably attractive given Rexam's track record and its growth potential.

Consider these figures. The average American uses 360 beverage cans each year whereas the average consumer in Western Europe only uses 75 cans. In emerging markets such as Brazil, the figure falls to 60 cans.

What's more, plastic products offer significant growth potential, especially when Rexam can charge higher prices for packaging that includes pumps and the like.

Rexam's big problem is that prices for aluminium and other raw materials are rising fast. The company has done a fair amount of hedging, but the hedges will run out eventually and Rexam will have to pass on increased costs to its customers.

I'm fairly relaxed on this issue. I suspect that higher prices won't significantly reduce demand for packaged products, but I can't be sure.

National Grid

I highlighted National Grid back in February and I still the like the share now. The company's core business is a monopoly -- the transmission of electricity in the UK.

Monopolies normally produce lots of cash and National Grid is no exception. Analysts expect the company to generate cash flow of 85.7p a share this year, and the dividend should be somewhere around 27p -- a 4.7% yield.

The company issued an upbeat trading statement in March and the outlook seems promising. Barring a disaster with the regulator, National Grid will probably continue to pay a healthy dividend for years to come.

BT Group

BT would be the riskiest investment of these three companies. We all know that the telecoms world is changing and BT's revenue from traditional voice calls is falling fast.

BT is trying to replace the lost income with cash from its "New Wave" businesses such as broadband and IT services. Indeed, New Wave already accounts for one third of BT's turnover. The next step will come later this year when BT launches a Freeview set-top box which will also enable viewers to download video-on-demand content over the net.

The market appears to be uncertain whether BT can successfully pull off these changes. That's why the company is trading on such a low price/cashflow rating. If BT does succeed, there should be plenty of cash for patient investors.

Another way to look for cash

Fool writer Maynard Paton always considers cash generation when he looks at potential tips for our Champion Shares investment service.

There's one superbly cash generative company on his buy list right now. Sign up for a free 30-day trial to Champion Shares, and you could read Maynard's full recommendation of that company right now.