Editor's Note: In the table, the yield and P/E columns were inadvertently transposed earlier today. We have fixed the problem.
WHAT ARE WE LOOKING FOR?
Nice safe stocks that have lots of free cash flow in case the economy turns south.
MORE ABOUT TODAY'S SCREEN
We'll turn to some work done by the research folks at TD Securities Inc. last week. In a report titled Behind the Security Perimeter, TD screened for stocks its analysts rate "low" or "medium" risk and ranked them by free cash flow yield. This should produce a list of companies that have plenty of cash flow to survive downturns.
TD rates all commodity stocks as "speculative" or "high" risk so they won't show up in this screen.
The free cash flow yield is based on TD's 2010 forecasts. They define free cash flow as operating cash flow after changes in non-cash working capital minus expected sustaining capital expenditures. "Sustaining capital expenditures" are those needed to maintain operations, as opposed to expand operations.
WHAT DID WE FIND OUT?
The screen produced a lot of utility companies and trusts with decent dividend or distribution yields.
TD warns that this screen has limitations. For example, a company might have a high free cash flow yield, but may also be planning to spend a lot of its excess cash on expansion. "This means that looking at free cash flow yields alone could potentially dramatically overstate a given company's financial flexibility." Investors will need to do more research to examine each company's expansion plans.