Do Cash Cows Beat Value and Dividends?
Three well established US-listed ETFs for US, non-US and global equities have recently been launched in Europe. Their 8 year history suggests that free cash flow has historically been more important than pure value measures, or dividends, in determining performance.
Pacer US Cash Cows 100 ETF (COWZ) picks the 100 Russell 1000 companies with the highest free cashflow yields, which current work out at 7.76%: more than double the Russell Value Index average of 3.31% and almost triple the overall Russell 1000 index average of 2.92%.
They are weighted by trailing fresh cash flow subject to a cap of 2%. The largest sector weight is unsurprisingly energy, followed by consumer discretionary and healthcare.
The US version of this ETF has been running since 2016, has outperformed the Russell 1000 by a small margin and the Russell Value by almost 6% per year.
Pacer Developed Markets International Cash Cows 100 ETF (ICOW) applies the same methodology but to a different index: FTSE Developed ex US 500. This results in 100 companies with a huge free cash flow yield of 10.77%, nearly triple that of the index, and a PE ratio of just 6.6, less than half that of the index.
Since inception in 2016, it has almost exactly matched FTSE Developed ex-US Index and performed two percentage points ahead of the EAFE Value Index.
Meanwhile, Pacer Global Cash Cows Dividend ETF (GCOW) starts with a free cash flow yield screen but also adds a dividend yield filter. This arrives at 100 companies with an average PE ratio of 8.37, and a dividend yield of 5.37% that is covered by their free cash flow yield of 6.79%. Its sector mix is similar to the other two products, with energy and healthcare in the top three.
Since 2016, this is the odd one out: it has slightly underperformed MSCI World Value Index and considerably lagged the index it selects stocks from, FTSE Developed Large Cap, including US and non-US stocks, by nearly 5% per year.
This suggests that adding the dividend filter has detracted rather than added performance, compared with the other two ETFs using only free cash flow. This may not be surprising. Some companies paying no dividend still return capital to investors through share buybacks, which may also be more tax efficient for many investors where dividend income tax rates exceed capital gains tax rates. A dividend is superficially attractive, but it is more meaningful to look at total free cash flow.