3 Stocks Growing Free Cash Flow Like Crazy

Stocks like Canadian Natural Resources Ltd (TSX:CNQ)(NYSE:CNQ) may not post big accounting profits, but they’re generating gobs of cash. Here are three promising stocks flush with cash flow.

| More on:
Growing plant shoots on coins

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Investors often pay a lot of attention to profits — and for good reason. The problem is that reported profits can be manipulated using a variety of accounting shenanigans.

Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, once described why he’s skeptical of accounting numbers like net profit.

“Accounting is the language of practical business life,” Munger admits, “but you have to know enough about it to understand its limitations. Because although accounting is the starting place, it’s only a crude approximation. And it’s not very hard to understand its limitations.”

What you can’t fake is cold, hard cash. That’s a big reason why seasoned investors rely on cash flow metrics, not profitability.

At the end of the day, a company can always return cash to investors. Accounting profits, meanwhile, don’t always result in distributable earnings. It’s easy to hide losses with accounting maneuvers (see Enron), but cash is cash.

Which stocks are set to grow free cash flow quickly? Here are three promising options.

Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ)

Canadian Natural has had a tough time battling depressed oil prices, but management has maneuvered the company to produce excess cash flow even during a bear market.

Today, the company is free cash flow neutral down to US$39 per barrel, even including its 3.9% dividend.

In 2018, the company generated $2.9 billion in free cash flow. This year, free cash flow should rise to $5.3 billion, all of which can be used to boost the dividend or repurchase shares.

Canadian Natural stock is down 20% over the past 12 months, despite improved conditions. If the share price doesn’t cooperate, expect the company to spend as much as $3 billion to buy back shares, providing a clear catalyst for upside.

Encana (TSX:ECA)(NYSE:ECA)

Encana has also had a difficult time transitioning to lower-for-longer energy prices. Today, its stock trades at just $7 per share, the same price shares traded at in 2004.

It’s been a long road, but management appears to have transformed the business, even if the market hasn’t shown much appreciation yet.

In 2019, Encana should post its second year in a row of positive free cash flow. It won’t be much, but it represents a major shift from previous years when the company bled billions in capital.

Recently, management noted that rising energy prices have the potential to lift their free cash flow estimates even further.

In a confident move, the company recently instituted a $1.25 billion share buyback. That’s more than 10% of the entire company. Already, Encana has repurchased 91 million shares at an average price of $7.19 per share.

As with Canadian Natural, Encana should be content with betting on itself until the market realizes its situation has taken a hard turn for the better.

Alimentation Couche-Tard (TSX:ATD.B)

Unlike the stocks listed above, Alimentation has been a cash flow machine for decades.

Since 1999, Alimentation stock has risen from just $0.85 per share to nearly $80 apiece. This rise has been fueled by its proven ability to generate gobs of cash.

Today, Alimentation is huge. It operates roughly 10,000 convenience stores across every province in Canada and nearly every U.S. state. It also operates nearly 3,000 stores in Europe.

While Alimentation has used its cash flow to grow operations in the past, I’ve argued that it’s time to return money to shareholders.

Last quarter, Alimentation earned $1.08 per share. That would equal $4.32 per share in earnings on an annualized basis. Its dividend only accounts for $0.50 per share in annual expenses. Overnight, the company could quadruple its dividend while still retaining most of its earnings.

Alimentation is the rare company that can substantiate its high earnings growth with ample free cash flow. This stock has been a winner for more than two decades. Don’t be surprised to see that cash flow finally make its way back into shareholders’ pockets.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of Berkshire Hathaway (B shares). Fool contributor Ryan Vanzo has no position in any stocks mentioned. Couche-Tard is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

edit Person using calculator next to charts and graphs
Dividend Stocks

The 3 Best Dividend Stocks for Monthly Passive Income

These three dividend stocks are the best options for those seeking high passive income in the next few years in…

Read more »

clock time
Dividend Stocks

Got $10,000 to Invest? 1 Cheap TSX Stock to Buy Right Now

This top TSX dividend stock is finally on sale and has made some savvy buy-and-hold investors quite rich.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Want Monthly Passive Income? These TSX Dividend Stocks Are for You

If you want monthly passive income from TSX stocks, you have to do a little digging. I've given you a…

Read more »

ETF chart stocks
Dividend Stocks

3 International ETFs to Buy for a Diversified Portfolio

Some international markets may prove more resilient against economic downturns, and exposure to them may strengthen your portfolio during crashes…

Read more »

Payday ringed on a calendar
Dividend Stocks

TFSA Pension: 3 Canadian Dividend Stocks to Buy for Monthly Passive Income

These high-yield Canadian stocks look good to buy right now for a TFSA focused on monthly passive income.

Read more »

TIMER SAYING TIME FOR ACTION
Dividend Stocks

Need $500 Right Away? These 3 Passive-Income Stocks Have Got You Covered

I could really use an extra $500 to feed my kids, who seem to be permanently hungry. Couldn't you?

Read more »

Young adult woman walking up the stairs with sun sport background
Dividend Stocks

3 Top TSX Stocks to Begin Your Investment Journey

Given their solid business models and stable cash flows, these three TSX stocks are ideal for income-seeking investors.

Read more »

Community homes
Dividend Stocks

Housing Market Crash: How to Make a Profit 

The housing market crash is here, but you can still earn dividends with Brookfield Infrastructure Partners (TSX:BIP.UN)(NYSE:BIP).

Read more »