Fools love cash flows. The richer, the better — and free cash flows are also the best way to find the proper value of your favorite stocks.
We also love the Dow Jones Industrial Average (Dow Jones Indices:.DJI). The market’s premier index strives to mirror the American economy by focusing on top-notch businesses from every important sector. The Dow has been around for nearly 107 years now. That staying power is proof positive that investors care about this approach.
So what happens when you combine these two stock-finding approaches? It might surprise you, but only half of the 10 richest cash-flow generators on today’s market qualify for inclusion in the Dow.
The price-weighted nature of the Dow is a high barrier of entry for some brilliant businesses.
Most of the non-Dow names here have share prices in the several-hundred-dollar range, whose inclusion would more or less turn today’s Dow into a tracking ETF for these high-priced shares. Berkshire Hathaway Inc. (NYSE:BRK.B) is the poster boy for this problem, with class A shares trading for $162,700 today. Class B shares, with a price of just $108, would be a much better fit for the Dow, but the index isn’t keen on dual-class stocks. So Warren Buffett’s genius won’t drive the Dow in a direct way until the ownership structure is boiled down to a single class, with prices around the class B stock’s.
Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) also fall under that category. Neither company trades in multiple classes (not yet, anyway — Google Inc (NASDAQ:GOOG) is planning to go there, pending shareholder approval), but the stocks are several times more expensive than the highest-priced Dow stocks today. A quick share split could rectify this, but nobody expects the two technology giants to take that route anytime soon.
Stock in cable service titan Comcast Corporation (NASDAQ:CMCSA) is easily cheap enough to fit in the Dow index, but it sports a dual-class stock structure. And you could argue that the consumer services industry is already well represented by two telecom giants.
Likewise, Oracle Corporation (NASDAQ:ORCL) isn’t likely to find a spot on the Dow until at least one of the five pure-play hardware and software businesses drops out. That’s another limiting factor for Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG), by the way.
The article The 10 Richest Cash Flows on the Market originally appeared on Fool.com and is written by Anders Bylund.
Fool contributor Anders Bylund owns shares of Google, but he holds no other position in any company mentioned. Check out Anders’ bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of Apple, Google, Oracle, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Google, Apple, and Berkshire Hathaway.
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