As an investor, it pays to follow the cash. If you figure out how a company moves its money, you might eventually find some of that cash flowing into your pockets.
In this series, we’ll highlight four companies in an industry and compare their “cash king margins” over time, trying to determine which has the greatest likelihood of putting cash back in your pocket. After all, a company can pay dividends and buy back stock only after it’s actually received cash — not just when it books those accounting figments known as “profits.”
Today, let’s look at Las Vegas Sands Corp. (NYSE:LVS) and three of its peers.
The cash king margin
Looking at a company’s cash flow statement can help you determine whether its free cash flow actually backs up its reported profit. Companies that can create 10% or more free cash flow from their revenue can be powerful compounding machines for your portfolio. A sustained high cash king margin can be a good predictor of long-term stock returns.
To find the cash king margin, divide the free cash flow from the cash flow statement by sales:
Cash king margin = Free cash flow / sales
Let’s take McDonald’s Corporation (NYSE:MCD)‘s as an example. In the four quarters ending in December, the restaurateur generated $6.97 billion in operating cash flow. It invested about $3.05 billion in property, plant, and equipment. To calculate free cash flow, subtract McDonald’s investment from its operating cash flow. That leaves us with $3.92 billion in free cash flow, which the company can save for future expenditures or distribute to shareholders.
Taking McDonald’s Corporation (NYSE:MCD) sales of $25.5 billion over the same period, we can figure that the company has a cash king margin of about 14% — a nice high number. In other words, for every dollar of sales, McDonald’s Corporation (NYSE:MCD) produces $0.14 in free cash.
Ideally, we’d like to see the cash king margin top 10%. The best blue chips can notch numbers greater than 20%, making them true cash dynamos. But some businesses, including many types of retailing, just can’t sustain such margins.
We’re also looking for companies that can consistently increase their margins over time, which indicates that their competitive position is improving. Erratic swings in margins could signal a deteriorating business, or perhaps some financial skullduggery; you’ll have to dig deeper to discover the reason.
Here are the cash king margins for four industry peers over a few periods.
|Company||Cash King Margin (TTM)||1 Year Ago||3 Years Ago||5 Years Ago|
|Las Vegas Sands||14.5%||12.3%||(31.9%)||(116.3%)|
|MGM Resorts (NYSE:MGM)||5.5%||5%||7.6%||(25%)|
|Melco Crown Entertainment (NASDAQ:MPEL)||17.9%||17%||(78.9%)||(146.8%)|
|Wynn Resorts (NASDAQ:WYNN)||18.3%||25.3%||1.7%||(13%)|
Las Vegas Sands Corp. (NYSE:LVS) exceeds our 10% threshold by nearly 5 percentage points, and has offered significant growth in its cash king margins over the past five years. It also offers a 1.9% dividend yield. Like Sands, Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) has shown great growth in free cash flow, following some buildouts of its properties. Wynn offers even higher margins at 18.3%, and also offers significantly higher margins than it had five years ago. It also offers an even higher dividend yield than Las Vegas Sands Corp. (NYSE:LVS), at 3.3%. However, its margins have declined significantly from last year. MGM Resorts International (NYSE:MGM) only offers 5.5% margins, which are much higher than what they had five years ago, but its margins are currently more than two percentage points lower than they were three years ago. Neither MGM nor Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) offer dividends.