If you are currently a shareholder in Portland General Electric Company (NYSE:POR), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, Portland General Electric is currently valued at US$4.6b. Today we will examine Portland General Electric’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
What is free cash flow?
Free cash flow (FCF) is the amount of cash Portland General Electric has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
I will be analysing Portland General Electric’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
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
Along with a positive operating cash flow, Portland General Electric also generates a positive free cash flow. However, the yield of 0.87% is not sufficient to compensate for the level of risk investors are taking on. This is because Portland General Electric’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for Portland General Electric?Can Portland General Electric improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, a growth of low single-digit 4.8% isn’t exciting, but it may be adequate, so long as capital expenditure doesn’t ramp up by even more. Below is a table of Portland General Electric’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)||US$630m||US$616m||US$644m||US$660m|
|OCF Growth Year-On-Year||-2.2%||4.5%||2.4%|
|OCF Growth From Current Year||2.3%||4.8%|
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Portland General Electric relative to a well-diversified market index. Moreover, the stock’s low growth prospects in terms of cash flow, seems worrisome. Now you know to keep cash flows in mind, I suggest you continue to research Portland General Electric to get a better picture of the company by looking at:
- Valuation: What is POR 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 POR 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 Portland General Electric’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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.