Morningstar's Larson Recommends Three High Free Cash Flow Yield Stocks: GD, NVS, APOL

What this is, is you take all the operating cash flow that the company is able to generate in a given period and you subtract out the company's capital expenditures, and what's left is the free cash flow. Then you take that number and you divide it by the current market capitalization and you get a free cash flow yield.

“General Dynamics, this is a wide-moat defense contractor. They have a wide moat because they are the sole provider of a large number of defense items such as nuclear submarines, certain tanks, so on and so forth. The free cash flow yield on this stock is just under 10% today. I think this is a very attractive price for a company that is, excuse the pun, very defensive, very little economic sensitivity.

Yes, there is concern about budget deficits and will we see a lower defense spending in the future. But I think that the market is pricing that in and then a whole lot more conservatism over and above what it already is. Our fair value estimate on General Dynamics is $78. The stock is in the low $60s. I think it's an attractive bargain.”

“Novartis, this is a health-care giant based out of Switzerland, and they are in all sorts of health-care arenas, whether its vaccines, pharmaceuticals, consumer products, devices. They basically cover the waterfront in health care.

This one has a free cash flow yield that's a little bit lower than some of the most attractive highest free cash flow yields. The free cash flow yield is only about 8% for this company.

But I think that this is still a very attractive price for this, given the very defensive business that they are in as well as the fact that they should have a fairly handsome growth rate going forward, somewhere in the mid- to high-single-digit range. Again, it has a wide moat, a healthy balance sheet. I think that it's a very attractive trade-off between potential return and the risk, which is quite low.”

”Apollo Education, and you're absolutely right. The last couple of years have been very rocky for all the for-profit education companies. But it's funny. If you look at the financial statements of these firms, and you didn't pay attention to the headlines and you just had the financials, you would think that these are just phenomenal businesses with very high growth rates, high returns on capital, very profitable businesses. But again, it's been very rocky in the headlines and some concern about whether the government is going to crack down on these. But the price that's available on the market again takes those factors and magnifies it to too-large degree.

Apollo Education, the free cash flow yield here is just under 11% today, and that is for a company that has had a growth rate in excess of 20% the last couple of quarters and also has a sparkling balance sheet, a couple of dollars a share in net cash, and very high returns on capital.”