Cash cows outperform the market in 2022

2022 is all about cash cows — companies churning out abundant free cash flow. These stocks have outperformed money-losing businesses, and here’s one explanation why.

In a recession, survival is key. Without free cash flow, companies must rely on raising capital (debt/equity) to survive — and it gets much harder to raise money during a recession.

ELI5: Free cash flow (FCF) is the cash left after a company pays its expenses, taxes and long-term investments. FCF can be used to invest in growth, pay off debt or pay shareholders (dividends or stock buybacks).

• FCF yield: FCF yield helps us compare how much free cash flow a company makes as a percentage of its market value.
• Example: Exxon Mobil made $40B in FCF in the last 12 months and has a $397B market cap. Divide $40B by $397B, and you get 10% — the FCF yield.

The Pacer US Cash Cows 100 ETF (BATS:COWZ) — which aims to hold companies with high FCF yield — is up 1.3% in 2022. Its top holdings include:

• Valero Energy (NYSE:VLO) — 9.5% FCF yield.
• McKesson Corp (NYSE:MCK) — 8.5% FCF yield.
• Occidental Petroleum (NYSE:OXY) — 16% FCF yield.

In comparison, Snap has a 0.9% FCF yield, while several growth stocks like DraftKings generate negative FCF — not a favorable position during a market downturn.

Dividends on top: Should CEOs invest in growth, buy back their own stock or payout dividends? Investors have an answer for them: dividends.

When it comes to using that extra cash, investors favor companies that pay dividends.

• The S&P 500 High Dividend Index — which tracks S&P 500 stocks with high dividends — is up 2.8% in 2022.
• The S&P 500 Buyback Index — which tracks S&P 500 stocks with a high portion of stock buybacks — is down 12% in 2022.