Are Swisscom AG (VTX:SCMN) Shareholders Getting A Good Deal?
Swisscom AG (VTX:SCMN) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the integrated telecommunication services industry, SCMN is currently valued at CHF23.07b. I will take you through SCMN’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
Check out our latest analysis for Swisscom
What is free cash flow?
Swisscom’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Swisscom to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Swisscom’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
Along with a positive operating cash flow, Swisscom also generates a positive free cash flow. However, the yield of 2.19% is not sufficient to compensate for the level of risk investors are taking on. This is because Swisscom’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for Swisscom?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at SCMN’s expected operating cash flows. In the next couple of years, expected growth for SCMN’s operating cash is negative, with operating cash flows expected to decline from its current level of CHF3.80b. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. However, breaking down growth into a year on year basis, SCMN ‘s negative growth rate improves each year, from -3.6% in the upcoming year, to -1.3% by the end of the third year.
Next Steps:
Four words – low yield, negative growth. Swisscom doesn’t jump out to me as an exciting new investment for you. If you buy the stock, you’re taking on higher risk relative to holding the market index, and further, you are being compensated for less. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Swisscom to get a more holistic view of the company by looking at:
Valuation: What is SCMN 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 SCMN 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 Swisscom’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.