A cash cow is a metaphor for a business, product, or asset that generates significant and consistent cash flow over a long time. It requires minimal investment or maintenance, much like a dairy cow that continuously produces milk.
Though the origins and coining of the term are not clear, the term cash cow traces its origins back to 1970, when the Growth Share Matrix was created.
A cash cow company in a growth-share matrix represents companies that have a high market share, strong cash flow, and low reinvestment needs. Cash generated from their business will most likely be channeled to dividend payouts.
Thus, a cash cow does look like a holy grail to investors seeking passive income. While there are many approaches to seeking out a cash cow dividend-paying company, the more reliable ones are via the free cash flow method.
Cash Cow ETFs Methodology- ICOW and GCOW
Investors who are educated but prefer to invest the passive way would have heard of the Cash Cow ETFs. Currently, the more well-known ones are Pacer Developed Markets International Cash Cows 100 ETF (BATS: ICOW) and Pacer Global Cash Cows Dividend ETF (BATS: GCOW).
Both ETFs have a similar approach, which uses an objective, rules-based methodology to provide exposure to companies with high dividend yields backed by a high free cash flow
yield.
The initial universe of companies is screened based on their average projected free cash flows and earnings (if available) over each of the next two fiscal years. Companies with negative average projected free cash flows or earnings are removed from the Index universe.
The difference between ICOW and GCOW is that GCOW includes dividend yield as one of its criteria.
With this criteria, ICOW and GCOW have included 5 Singapore stocks in their ETFs. Here are the 5 stocks:
1) Singapore Telecommunications Ltd
Singapore Telecommunications Ltd (SGX: Z74) is no stranger to all of us. With a dominant presence in Southeast Asia and Australia, it boasts a diverse portfolio spanning mobile, broadband, cloud services, and digital advertising.
Just a few weeks back we covered how investors who invested in Singtel since its listing have lost money, even after including of dividends.
From a free cash flow and dividend yield point of view, Singtel does look like a dividend powerhouse.
Alas if we were to include Singtel’s historical revenue over the past 10 years, things do not look rosy.
Singtel has a small weightage of 0.53% on GCOW. Even though it is experiencing its toughest headwinds, the relatively small weightage should not be a great concern for investors looking to invest GCOW.
2) Singapore Airlines Ltd
I will never forget how starstruck I was the first time I took Singapore Airlines (SGX: C6L). To this very day, going onboard any SQ flight exudes a kind of je nais se quois.
Singapore Airlines, together with Changi Airport, are parts of Singapore that the world would be proud of.
SIA, together with other airlines and hospitality REITs, were bashed up badly when travel came to a halt. But upon reopening of the borders, SIA has never looked back.
Revenue surged to an all-time high, and free cash flow margins are at an astounding 42.33%. This is an achievement that before COVID-19, was something unfathomable.
However, there are many moving parts of an airline’s profitability, including passenger load, and fuel price hedges, so I wouldn’t be very certain that the margins and bumper dividends can stay consistent.
That said, a weightage of 1.77% in ICOW and 0.33% in GCOW shows that the company is ticking the right boxes now for the time being.
3) Jardine Matheson
Jardine Matheson Holdings Limited (SGX: J36) is a Hong Kong-based conglomerate, that boasts a 191-year history deeply intertwined with Asian economic development. It is a conglomerate, counting various businesses under its portfolio, ranging from motor vehicles, property investments, food retailing, and many more. That is often trading below fair value.
Buying into Jardine Matheson is akin to investing in its portfolio of businesses since the conglomerate is just an investment holding company.
Jardine counts some of the largest property investment companies – Hongkong Land Holdings Limited (SGX: H78) as its holdings, alongside its hotel chain and brand Mandarin Oriental International Ltd (SGX: M04).
It is also the owner of DFI Retail Group Holdings Ltd (SGX: D01).
Looking at Jardine Matheson, one could understand why it fits the cash cow criteria perfectly. It has a stable free cash flow and a respectable 6% dividend yield.
It currently has a weightage of 0.21% on GCOW.
4) Jardine Cycle & Carriage Ltd
Jardine Cycle & Carriage Ltd (SGX: C07) has humble beginnings, starting from a humble bicycle dealership to becoming a top automobile dealer.
The uncanny similarity in terms of name and its logo should give it away – it is part of the Jardine Matheson conglomerate. Jardine Matheson owns 77% of JC&C.
Just like the holding company, JC&C also saw better free cash flow margins post-COVID. It used to sport a free cash flow margin in the range of 4%-8% in the last 5 years.
It trades at a dividend yield of around 5% and constitutes 0.17% of GCOW.
5) Genting Singapore Ltd
Genting Singapore Ltd (SGX: G13) is a leading integrated resort operator in Southeast Asia and boasts a dominant position in Singapore’s lucrative market.
The principal activities of the company’s subsidiaries include developing and operating large-scale integrated resorts, investments, and casino operations. It is the subsidiary of the Genting Berhad (KLSE: GENTING), listed on the KLSE.
Genting Singapore’s business revolves around Resorts World Sentosa, which includes hotels, S.E.A. Aquarium™, Adventure Cove Waterpark™, Universal Studios Singapore™, ESPA, and other dining, retail, and entertainment options.
Revenue dipped tremendously during the COVID-affected fiscal years but has seen a recovery trend.
The free cash flow margin is surprisingly high, typically around 45%-49%.
Genting Singapore contributes to 0.15% of ICOW’s latest holdings as of the time of writing.
GCOW and ICOW through the lens of an investor
I always ask myself this same question over and over – is there a golden ratio that I can just look at to make my buy or sell decision in the world of investing?
If there is one, what would it be?
I went from Return on Invested Capital (ROIC) to Free Cash Flow Margin. These 2 are the winning KPIs to look at, but they are not without their flaws.
As we have seen with some examples, a superior free cash flow margin with no growing revenue is just a ticking time bomb of a company slowly losing its shine.
Like all other ETFs, no matter how rounded the methodology is, there will bound to be stocks included that prompt me to question the quality of the company.
Thankfully, the diversification part helps smooth out any underperformances of a handful of companies, while the rest can pull up the ETF’s performances. ETFs like GCOW and ICOW have a solid framework, with me just being picky.
That’s why I stay with stock picking for most of my portfolio.