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Going with the Cash Flow

These companies consistently generate excess cash.

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If you had to narrow your stock search to one data point, cash flow would be a logical place to start. What's so great about free cash flow? To start, reported cash flows are much less subject to accounting gimmicks than reported earnings. While it's all too common for company management to stretch the limits of generally accepted accounting principles to meet targets for earnings per share, cash flows generally don't lie. Plus, free cash flow has tangible value. You can't take reported earnings to the bank, but free cash flow measures the amount of money the company has available to invest in new revenue opportunities, pay dividends, or buy back shares.

For this week's Five-Star Investor, we used Morningstar's  Premium Stock Screener to find companies that have consistently generated free cash flows equivalent to at least 5% of their annual sales. Fewer than 600 of the 7,000 companies in Morningstar's stock database were able to meet that hurdle.

Amy C. Arnott has a position in the following securities mentioned above: MSFT. Find out about Morningstar’s editorial policies.

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