Investing

3 Strong Cash Flow Stock Picks for Solid Dividends and Upside Ahead

Jon C. Ogg

Published: July 2, 2020 7:22 am

It is no secret that 2020 has been an economic roller-coaster ride. Going from the strongest economy of our lives to the COVID-19-induced recession has been unprecedented for everyone except those who can remember the Great Depression of the 1930s. With a highly contested presidential election coming later in the year, and trying to deal with dismal economic numbers, investors are looking for just about any new idea that they can get their hands on to try and decide how to be invested for the rest of this year.

Investors love their dividends, and one top means of determining how solid a dividend can be after earnings is cash flows. Credit Suisse uses a systematic and objective framework within its “HOLT” team. The research group has 30 preferred stock ideas in which it sees strong returns on cash flows with compelling characteristics in its models. The firm is also more skewed to what it called “high operational qualities” due to the heightened uncertainty in the stock market.

While 30 companies may be a lot to ponder, the HOLT team has three new ideas for the third quarter of 2020. These companies all have strong cash flows and solid dividends, and they also come with alternative price targets that are different from their fundamental analyst ratings. The firm employs a cash flow return on investment (CFROI) analysis to look for additional longer-term upside.

Here, 24/7 Wall St. features these companies, along with Credit Suisse’s HOLT team analysis, and we have added some commentary. Also included are the most recent prices, the trading ranges, the Refinitiv consensus analyst target prices and what each stock’s dividend looks like.

Here are three top cash flow ideas from Credit Suisse with high CFROI profiles.

Comcast Corp. (NASDAQ: CMCSA) has shown increasing levels of CFROI over the past decade. This may be largely due to its improvements in the NBCUniversal unit. While forecasts now point to lower cash flow returns for 2020 and 2021, the market already has lower expectations. The firm’s target price is $48 and its rating is Outperform, but its HOLT valuation is considered to be a contrarian theme, and that target would be up at $62.96.

Comcast stock recently closed at $39.70 per share, with a 52-week trading range of $31.71 to $47.74. Its consensus price target was $45.10, and its dividend yield is 2.3%. While Credit Suisse was positive on Comcast, Bernstein also raised its rating to Outperform from Market Perform and its target price to $52 from $48.

eBay Inc. (NASDAQ: EBAY) currently stands out for its high-quality CFROI profile. The stock also appears to have attractive valuations and low market expectations. Additional boosts are expected from a new chief executive officer, increased share repurchases and growth in the digital payments arena.

Credit Suisse rates eBay as Outperform and has a $53 price target, but its cash flow valuations would dictate a valuation of $65.92.

While eBay has only a 1.3% dividend yield, it is still relatively new to dividends, after it began paying them in 2019. Many investors also expect that eBay will be a dividend grower in the years ahead, and it was one of the stay-at-home winners in the new economy. At $52.75 per share on last look, eBay stock has a 52-week range of $26.02 to $53.43, and its consensus target price is down at $48.92.

Lockheed Martin Corp. (NYSE: LMT) has a strong cash flow profile as well. The defense contractor’s competitive advantages over peers and the resilience of its end markets are key drivers here. Credit Suisse also pointed out that expectations are low relative to its forecasts, despite having clear visibility on future business.

Credit Suisse’s rating on Lockheed Martin is actually Neutral, but the $433 price target is handily higher than the latest $360.42 closing price. The firm’s HOLT valuation was shown to be $698.61.

Lockheed Martin stock recently closed at $360.42, with a 2.6% dividend yield. Its 52-week trading range is $266.11 to $442.53, and the consensus target price was $433.72.