The FTSE stocks with free-cash-flow magic

It can often be hard to value FTSE shares, with all those figures. But in the end, it’s all down to hard cash. And the more the better.

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What do we look for from FTSE stocks? For some of us it’s capital growth. For others it’s dividend income. Both can be great, but neither can succeed unless the cash is there.

Revenue is no good if it doesn’t turn into profit. And profit doesn’t work if it doesn’t mean actual free cash flow.

Without cash, dividends can’t keep going. And a firm can’t reinvest in its business for growth.

So today, I’m looking at a few FTSE stocks that seem very good at creating long-term cash flows.

FTSE cash cows

Taylor Wimpey (LSE: TW.) has a 7% forecast dividend yield. But the company reported a big drop in profits for 2023.

Still, the update said “We continue to be highly cash generative with year end net cash of £677.9m“. And that’s after paying £337.9m in dividends.

We saw £503m in operating cash flow, before changes in working capital. And that’s in a bad year. The previous year, the figure was £942m.

The main risk with builder shares right now is down to high mortgage costs. Even when interest rates are cut, I think it could take a couple of years for the sector to build up again.

But I think Taylor Wimpey shows how strong cash flow can keep a firm going through tough times.

Consumer sales

I have to include British American Tobacco too. The business makes a product that consumers are literally addicted to, and sells at strong margins.

There’s a 9.8% forward dividend yield on the cards, and it should be strongly backed by cash.

For 2023, the firm posted adjusted cash generated from operations of £7.8bn. And it reported a 100% cash conversion rate.

The risk comes from not knowing how long tobacco sales will last, or how well the firm will succeed with its next generation products. But cash flow doesn’t seem to be a problem.

FTSE 250 income

I also like the look of the cash situation at FTSE 250 real estate investment trust Target Healthcare REIT.

The shares are down due to property fears. But the trust earns nice profit and cash streams from rentals.

In the first half of this year, profit before tax came in at £30.7m, which converted to net cash inflow from operations of £22.8m. And that’s after accounting for a £13.8bn reduction due to property revaluation and related items.

Again, it’s a stock hit by property risk, but supported by strong cash flow.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Safety first

For me, the key to long-term investing success is to seek safety first. It’s like ace investor Warren Buffett‘s first rule of investing: never lose money.

I make sure my Stocks and Shares ISA has a solid base of what I think are safe stocks, and I buy them before the market crashes

The way to find them, I think, is to make cash flow a priority. So, after the headlines, that’s what I look for next in a company update.

Remember, “turnover is vanity, profit is sanity and cash is reality“.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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