Monday, March 18, 2002

Cash to Burn

One theory of corporate finance says that the whole point of owning stock is to collect dividends on it. Yet this doesn't do justice to companies that generate healthy cash from their businesses but choose to pay no or meager dividends. To capture these, we screened for companies that generate cash above and beyond dividend payments. Specifically, our metric of excess cash flow is cash from operations less capital expenditures and dividends paid.

Example: DST Systems (nyse: DST - news - people ), a developer of statement- and billing-processing systems for financial services and communications firms, has enjoyed 27%-a-year growth in excess cash flow per share over the past three years.

Thornburg Value Fund has 700,000 DST shares. Fund manager William V. Fries notes that DST's model calls for spending heavily up front to develop technology, but the company collects revenues for each mutual fund or billing account it processes. Over its past eight reported quarters, DST Systems has averaged excess cash flow equal to 11% of sales. DST has used its cash to reduce shares outstanding. Other ways shareholders can be enriched: A company pays down its debt or expands its business.

Full story at (reg. required)