Yahoo Finance Are Redrow plc (LON:RDW) Shareholders Getting A Good Deal?
If you are currently a shareholder in Redrow plc (LON:RDW), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, RDW is currently valued at UK£1.8b. I’ve analysed below, the health and outlook of RDW’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
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What is Redrow’s cash yield?
Redrow generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of Redrow’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Although, Redrow generate sufficient cash from its operational activities, its FCF yield of 8.3% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does Redrow have a favourable cash flow trend?
Can RDW improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 30%, ramping up from its current levels of UK£198m to UK£257m in two years’ time. Furthermore, breaking down growth into a year on year basis, RDW is able to increase its growth rate each year, from -19% next year, to 60% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
High operating cash flow growth is a positive indication for Redrow’s future, which means it may be able to sustain the current cash yield. However, if you factor in the higher risk of holding just Redrow compared to the well-diversified market index, the stock doesn’t seem as appealing. Now you know to keep cash flows in mind, I recommend you continue to research Redrow to get a more holistic view of the company by looking at:
Valuation: What is RDW worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RDW is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Redrow’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
