In 2004, the CEO of an online retailer stressed the importance of a particular metric when valuing a business.
“Our ultimate financial measure, and the one we most want to drive over the long-term, is free cash flow per share”, he wrote in his annual letter to shareholders.
Chances are very good you’ve heard of this CEO (Jeff Bezos), and odds are also high you’ve ordered a package from his company (Amazon).
Free Cash Flow, Explained
Free cash flow (FCF) is net of investment in working capital (operating assets required to run the business), interest expense (obligations to creditors), and capital expenditures (acquisition and replacement of property, plant, & equipment). The remaining cash is ‘free’ to use as management sees fit – which may include investing in growing the business (through acquisitions), returning capital to shareholders (through share repurchases or dividends), or simply building a war chest for future growth opportunities (by retaining that cash).
Why FCF is Crucial
Why is free cash flow so important? For one thing, the metric is fundamental to a company’s valuation. Indeed, in his 2004 missive, Bezos argued in favor of focusing on free cash flow rather than earnings. Shares, he wrote, “are worth only the present value of their future cash flows, not the present value of their future earnings.”
A history of strong free cash flow growth can also be indicative of quality characteristics such as profitability and operational efficiency. In other words, companies with consistently rising free cash flow tend to be very well run, with shareholders reaping the benefits. These firms have increased potential for higher return of capital to shareholders through dividends or share buybacks.
Introducing QOWZ: Invesco Nasdaq U.S. Free Cash Flow Achievers™ ETF
With the launch of the Invesco Nasdaq U.S. Free Cash Flow Achievers™ ETF (symbol QOWZ), investors can now get convenient access to U.S. companies with a track record of strong free cash flow growth. The Nasdaq U.S. Free Cash Flow Achievers™ Index is comprised of the 50 members of the Nasdaq U.S. Benchmark™ Index with the highest count of positive year-over-year changes in free cash flow over the past 11 years, excluding Financials and Real Estate securities. QOWZ is weighted based on market capitalization, with a maximum weight of 10% for any one stock.
The Invesco Nasdaq U.S. Free Cash Flow Achievers™ ETF offers investors a portfolio of free cash flow juggernauts--- plus all the advantages that come with an exchange traded fund.
What’s not to like about that?
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