Evaluating stocks involves considering many crucial factors, but the ability to generate cash is of uniquely paramount importance. At the end of the day, a business centers around the idea of generating cash over net income. Non-cash expenses like depreciation and amortization can make these two figures look very different.
Non-cash expenses affect net income but not cash flow. However, non-cash expenses are still important to consider, given that they have legitimate effects on business operations.
A key profitability metric that assesses a business’s ability to turn sales into cash available to shareholders is the free cash flow margin. It looks at a company’s free cash flow in relation to its sales, indicating cash profitability. Free cash flow shows how much money companies can give to shareholders.
It does this by subtracting the money spent on capital expenditures. Below are three large-cap stocks in the U.S. that led their sectors in free cash flow margin over the past 12 months. All metrics use data as of the Mar. 17 close.
1. Altria Group: Massive Free Cash Flow Margin Leads to Massive Dividend Yield
Leading the U.S. large-cap consumer staples sector in free cash flow margin is Altria Group (NYSE:MO). The company boasts a colossal free cash flow margin of over 42%. This towers over the 28% free cash flow margin of the second-ranked stock in its sector, Philip Morris International (NYSE:PM). The company’s extraordinary cash flow generation contributes greatly to its ability to have a sky-high dividend yield of 6.9%. This gives the stock a top 20 dividend yield among U.S. large-cap stocks.
Tobacco products are relatively easy to mass-produce, keeping costs down. At the same time, consumers are willing to pay higher prices given the addictive properties of nicotine. This creates an ideal relationship for a highly profitable and cash-generating business.
2. Airbnb: Share-Based Compensation Puts Free Cash Flow Margin at the Top of Its Sector
Over the last 12 months, Airbnb (NASDAQ:ABNB) has led the U.S. large-cap consumer discretionary sector with a free cash flow margin of just under 41%. Airbnb has come a long way since going public in late 2020. Compared to its first full year as a public company in 2021, its free cash flow increased by 108%, reaching $4.5 billion in 2024. The company lost $225 million in 2021, compared to profiting $2.6 billion in net income in 2024.
There is a massive $1.9 billion difference between the company’s net income and free cash flow, highlighting the effect of non-cash expenses. Much of this difference comes from Airbnb paying out $1.4 billion in total stock-based compensation over the last 12 months. Stock-based compensation pays employees for their work with Airbnb shares and is a non-cash expense.
One big concern with stock-based compensation is that it creates more shares. This can dilute existing shareholders when employees convert their stock options. However, Airbnb has also engaged in extensive share buybacks, which reduce this dilution effect. In 2024, the firm spent $3.4 billion on buybacks, reducing its outstanding shares. This reduction helps balance the impact of its big share-based compensation strategy.
The company has cut its fully diluted share count by more than 5% since Dec. 2022. In short, Airbnb’s free cash flow margin is somewhat inflated due to stock-based compensation. However, the company is considerably limiting the risks that come with this compensation method by using buybacks.
3. Texas Pacific Land: Free Cash Flow Margin Royalty of the Energy Sector
Texas Pacific Land (NYSE:TPL) rounds out this list with a monstrous free cash flow margin of over 65%. This leads all U.S. large-cap stocks in the energy sector. Much of the reason Texas Pacific Land is capable of such a high free cash flow margin is due to its royalty business model. The company owns around 873,000 acres of land in the Texas Permian Basin, the largest oil-producing basin in the United States.
Instead of extracting oil itself, the company leases out the rights to extract oil to other firms. This eliminates the vast costs and equipment needed to extract oil from the ground. In turn, Texas Pacific simply gets paid royalties based on the amount of oil extracted.
The company also monetizes the land’s surface rights and water rights above its oil reserves. This gives it the ability to maximize profits in a way that companies that only own oil reserves cannot.