Koninklijke Philips N.V. (AMS:PHIA) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the industry, Koninklijke Philips is currently valued at €28b. I will take you through Koninklijke Philips’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
What is Koninklijke Philips’s cash yield?
Koninklijke Philips’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Koninklijke Philips to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Koninklijke Philips’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Koninklijke Philips’s yield of 8.91% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock Koninklijke Philips is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is Koninklijke Philips’s yield sustainable?Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Koninklijke Philips’s expected operating cash flows. In the next couple of years, a double-digit growth in operating cash of 33% is expected. The future seems buoyant if Koninklijke Philips can maintain its levels of capital expenditure as well. Below is a table of Koninklijke Philips’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year||+3 year|
|Operating Cash Flow (OCF)||€2.2b||€2.3b||€2.6b||€3.0b|
|OCF Growth Year-On-Year||2.4%||14%||14%|
|OCF Growth From Current Year||17%||33%|
The yield you receive on Koninklijke Philips is in-line with that of holding the broader market index. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! Now you know to keep cash flows in mind, You should continue to research Koninklijke Philips to get a more holistic view of the company by looking at:
- Valuation: What is PHIA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PHIA is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Koninklijke Philips’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.