Yahoo Finance Have You Considered This Before Investing In Textron Inc (NYSE:TXT)?
Two important questions to ask before you buy Textron Inc (NYSE:TXT) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through TXT’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
Check out our latest analysis for Textron
What is Textron’s cash yield?
Free cash flow (FCF) is the amount of cash Textron 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.
The two ways to assess whether Textron’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
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
Textron’s yield of 6.68% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock Textron is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does Textron have a favourable cash flow trend?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at TXT’s expected operating cash flows. Over the next few years, the company is expected to grow its cash from operations at a low single-digit rate of 3.6%, increasing from its current levels of US$1.3b to US$1.4b. Furthermore, breaking down growth into a year on year basis, TXT is able to increase its growth rate each year, from -1.3% next year, to 5.0% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Textron is compensating investors at a cash yield similar to the wider market portfolio. But holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Textron to get a more holistic view of the company by looking at:
Valuation: What is TXT 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 TXT 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 Textron’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
