S&P 500 & Sectors: Free Cash Flow Is Up But Prices Are Down

Articles From: New Constructs
Website: New Constructs


Investment Analyst

New Constructs

The S&P 500’s free cash flow (FCF) remains high, but it is declining. The trailing FCF yield remains high as well, relative to recent quarters, because stock prices are declining more than FCF. We think the market is signaling expectations for further declines in FCF, and we expect prices will continue to fall until FCF bottoms out.

This report is an abridged and free version of S&P 500 & Sectors: Free Cash Flow Is Up But Prices Are Down, one of our quarterly series on fundamental market and sector trends.

The full version of this report analyzes[1],[2] free cash flow, enterprise value, and the trailing FCF yield for the S&P 500 and each of its sectors (last quarter’s analysis is here). These reports are available to those with a Pro or higher membership or can be purchased below.

This report leverages our cutting-edge Robo-Analyst technology to deliver proven-superior[3] fundamental research and support more cost-effective fulfillment of the fiduciary duty of care.

FCF Yield Rises Over the Last Year

2021 was a very profitable year for the S&P 500. The trailing FCF yield for the S&P 500 rose from 1.6% on 6/30/21 to 2.2% as of 5/16/22. The FCF yield for the S&P 500 has been this high only three other times since the beginning of 2015: 6/30/16, 12/31/18, and 3/31/22.

See Figure 1 in the full version of our report for the chart of FCF Yield for the S&P 500 from December 2004 thru 5/16/22.

Seven S&P 500 sectors saw an increase in trailing FCF yield from 6/30/21 to 5/16/22.  

Key Details on Select S&P 500 Sectors

The Energy Sector has the highest FCF Yield at 5.0% as of 5/16/22. On the flip side, the Real Estate sector, at -4.4%, currently has the lowest trailing FCF yield of all S&P 500 sectors.

The Telecom Services, Energy, Utilities, Financials, Healthcare, Consumer Non-cyclicals, and Consumer Cyclicals sectors each saw an increase in trailing FCF yield from 6/30/21 to 5/16/22.

Below, we highlight the Telecom Services sector, which had the largest YoY improvement in FCF yield.

Sample Sector Analysis[4]: Telecom Services

Figure 1 shows the trailing FCF yield for the Telecom Services sector rose from -5.3% as of 6/30/21 to 2.6% as of 5/16/22. The Telecom Services sector FCF rose from -$86.9 billion in 1Q21 to $37.3 billion in 1Q22, while enterprise value fell from $1.6 trillion as of 6/30/21 to $1.4 trillion as of 5/16/22.

Figure 1: Telecom Services Trailing FCF Yield: Dec 2004 – 5/16/22

Telecom Services Trailing FCF Yield: Dec 2004 – 5/16/22

Sources: New Constructs, LLC and company filings. 
The May 16, 2022 measurement period uses price data as of that date and incorporates the financial data from 1Q22 10-Qs, as this is the earliest date for which all the 1Q22 10-Qs for the S&P 500 constituents were available.    

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This article originally published on May 26, 2022.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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[1] We calculate these metrics based on S&P Global’s (SPGI) methodology, which sums the individual S&P 500 constituent values for market cap and economic book value before using them to calculate the metrics. We call this the “Aggregate” methodology.

[2] Our research is based on the latest audited financial data, which is the 1Q22 10-Q for most companies. Price data is as of 5/16/22.

[3] Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.

[4] The full version of this report provides analysis for every sector like what we show for this sector.

Click here to download a PDF of this report.

Disclosure: New Constructs

David Trainer, Kyle Guske II, Sam McBride, Matt Shuler, Alex Sword, and Andrew Gallagher receive no compensation to write about any specific stock, style, or theme.

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