The S&P 500’s free cash flow (FCF) remains at a healthy above-average level on a trailing basis, but a decline in FCF yield is alarming given the slowing economy that companies face.
This report is an abridged and free version of S&P 500 & Sectors: Free Cash Flow Yield Posts Quarterly Decline in 2Q22, 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.
Trailing FCF Yield Falls in 2Q22
The trailing FCF yield for the S&P 500 declined from 2.25% on 6/30/22 to 2.04% as of 8/12/22.
See Figure 1 in the full version of our report for the chart of FCF Yield for the S&P 500 from December 2004 through 8/12/22.
Just four S&P 500 sectors saw an increase in trailing FCF yield from 6/30/22 to 8/12/22.
Key Details on Select S&P 500 Sectors
With an 11.2% FCF Yield, investors are getting more FCF for their investment dollar in the Telecom Services sector than any other sector as of 8/12/22. 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, Real Estate, and Healthcare sectors each saw an increase in trailing FCF yield from 6/30/22 to 8/12/22.
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 -0.9% as of 9/30/21 to 11.2% as of 8/12/22. The Telecom Services sector FCF rose from -$14.0 billion in 2Q21 to $147.7 billion in 2Q22, while enterprise value fell from $1.6 trillion as of 9/30/21 to $1.3 trillion as of 8/12/22.
Figure 1: Telecom Services Trailing FCF Yield: Dec 2004 – 8/12/22
Sources: New Constructs, LLC and company filings.
The August 12, 2022 measurement period uses price data as of that date and incorporates the financial data from 2Q22 10-Qs, as this is the earliest date for which all the 2Q22 10-Qs for the S&P 500 constituents were available.
Figure 2 compares the trends in FCF and enterprise value for the Telecom Services sector since 2004. We sum the individual S&P 500/sector constituent values for free cash flow and enterprise value. We call this approach the “Aggregate” methodology, and it matches S&P Global’s (SPGI) methodology for these calculations.
Figure 2: Telecom Services FCF & Enterprise Value: Dec 2004 – 8/12/22
Sources: New Constructs, LLC and company filings.
The August 12, 2022 measurement period uses price data as of that date and incorporates the financial data from 2Q22 10-Qs, as this is the earliest date for which all the 2Q22 10-Qs for the S&P 500 constituents were available.
The Aggregate methodology provides a straightforward look at the entire S&P 500/sector, regardless of market cap or index weighting, and matches how S&P Global (SPGI) calculates metrics for the S&P 500.
For additional perspective, we compare the Aggregate method for free cash flow with two other market-weighted methodologies: market-weighted metrics and market-weighted drivers. Each method has its pros and cons, which are detailed in the Appendix.
Figure 3 compares these three methods for calculating the Telecom Services sector’s trailing FCF yields.
Figure 3: Telecom Services Trailing FCF Yield Methodologies Compared: Dec 2004 – 8/12/22
Sources: New Constructs, LLC and company filings.
The August 12, 2022 measurement period uses price data as of that date and incorporates the financial data from 2Q22 10-Qs, as this is the earliest date for which all the 2Q22 10-Qs for the S&P 500 constituents were available.
[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 2Q22 10-Q for most companies. Price data is as of 8/12/22.
[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.
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This article originally published on August 25, 2022.
Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation to write about any specific stock, style, or theme.
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