The saying “cash is king” is quite popular on Wall Street. Generally, a company uses cash to sustain its operations, fund expansion plans, target acquisitions, and enhance shareholder wealth via buybacks or dividends. Moreover, cash is also needed to pay back debt and make regular interest payments.
A company that is unable to sustain its operational objectives by the cash flow it generates has to rely on additional funding sources in the form of debt or equity, which weakens the balance sheet and overall fundamentals.
After more than a decade of low interest rates, central banks globally have increased the cost of debt to offset inflation. So, companies with access to cheap capital now have to generate enough cash flows to meet their debt obligations.
Basically, companies that can’t sustain organic growth supported primarily by cash flows are at a massive disadvantage given the current macro environment, which is sluggish. As we enter a new era of normalized interest rates, investing in companies that are cash-flow kings makes sense.
Here are two top TSX cash cows you should be buying right now.
Brookfield Asset Management stock
With US$850 billion in AUM (assets under management), Brookfield Asset Management (TSX:BAM) is among the largest alternative asset managers globally. It provides you with exposure to verticals such as infrastructure, private equity, real estate, credit, and clean energy.
Brookfield Asset Management aims to double its AUM and fee-bearing capital in the next five years, which should support earnings growth and higher dividend payouts. Currently, BAM stock offers investors an annual dividend of $1.73 per share, indicating a forward yield of more than 4%. BAM expects to increase its dividends between 15% and 20% annually through 2028, increasing its effective yield significantly.
Moreover, the company expects to end 2028 with an AUM of US$2 trillion and fee-bearing capital of at least US$1 trillion. Brookfield Asset Management has more than tripled its fee-bearing capital in the last five years, providing it with a steady stream of cash flows across market cycles.
Priced at 19.3 times forward earnings, BAM stock is very cheap, given its earnings estimates and tasty dividend yield. It trades at a discount of 25% to consensus price target estimates.
Canadian Natural Resources stock
One of the largest TSX companies, Canadian Natural Resources (TSX:CNQ) has returned close to 2,000% in the last 20 years after adjusting for dividends. Despite its market-thumping gains, CNQ offers shareholders a dividend yield of 4%.
Canadian Natural Resources is part of the cyclical energy sector. However, its low-cost business model allowed it to increase dividends by 20% annually in the last 23 years.
In the second quarter (Q2) of 2023, Canadian Natural Resources reported adjusted net earnings of $1.3 billion and funds flow of $2.7 billion. As planned maintenance activities were completed in Q2 of 2023, CNQ now aims to increase production volumes in the second half of 2023, resulting in higher cash flows and earnings.
The company’s top-tier reserves and asset base provide it with competitive advantages in terms of capital efficiency and flexibility. Priced at 11.6 times forward earnings, CNQ stock is still cheap and trades at a discount of 10% to its average target price.
