Three Wide-Moat Picks with Compelling Free Cash Flow YieldsStock Investing with Paul LarsonMorningstarJason Stipp: Im Jason Stipp for Morningstar as investors have continued to put money to work in bonds yields on that investment class have been persistently and stubbornly low but for those who are willing to think about yield a bit more broadly. This is an interesting opportunities in the stock space. Here with me to talk about what he has found is Morningstars Paul Larson. Hes editor of Morningstar stock investor and an equity strategist thanks for joining me Paul.Paul Larson: Thanks for having me.Jason: So quick question if you can give an overview of the yield environment out there, its tough right now for a lot of investors what are you seeing when youre looking at yields across the investment landscape?Paul: Well youre absolutely right. It is very tough if you walk up to the bank and you buy a CD or youre getting next to nothing same thing in the money market accounts, if youre going to go out and buy a long dated treasuries on the long end of the curve youre getting somewhere between 2-1/2 and 3-1/2% today and that is a very low yield both relative to other investments namely stocks as well as a relative to what have yielded historically.Jason: So were thinking about yield with bonds, we obviously get this coupon, you get a payment back when you buy a bond in some sort of you know tangible yield but when youre looking at stocks obviously some pay a dividend and thats also cash back to you but theres other ways to think about a yield from the stock. Can you explain that a little bit?Paul: Right one of the ways I like to think about it is by looking at the companys free cash flow yield and what this is you take all operating cash flow that the company is able to generate and then give in period and you subtract out the companys capital expenditures and whats left is the free cash flow and then you take that number and you divide it by account market capitalization and you get a free cash flow yield. Now youre absolutely right that this is free cash flow does not flow directly to our pockets as owners of the business but this is cash available for the owners of the business and a company managers can either choose to pay it out as a dividend. They can also buy back shares with this cash flow that theyre generating or they can choose to grow and expand the business either by organically building or by acquiring another business.Jason: So this is you know money potentially at the business could put back to work and were seeing attractive free cash flow yields among some stocks but as you were saying it still pays to be selective because you want a company that probably will do the right thing with this money either in reinvesting it or then paying out. You have some idea as for some really attractive companies with free cash flow yields. The first one is in the defense industry. Tell us a little bit about that pick what its yielding and why you think its attractive?Paul: Right general dynamics this is a wide mode defense contractor. They have a wide mode because they are the sole provider of a large number of defense items such as a nuclear submarines certain tanks and so on and so forth and the free cash flow yield in this stock is just under a 10% today and I think this is a very attractive price for a company that is excused upon very defensive very little economic sensitivity. Yes there is concern about budget deficits and you know well see a lower defense spending in the future but I think that the market is pricing that in and then a whole lot more conservatism over and above what it already is. Our fair investment on general dynamics is that the 78 dollars the stock is in the low 60s I think its an attractive bargainJason: So certainly thing we have 10% in comparing that to what you might get on certain fixed income instruments. Theres a vast difference there, what is atypical free casual you know what I mean what is 10% obviously seems high but where would you expect to start to be under normal times?Paul: I would say somewhere in the 4 to 5% range for a company that has a what you might call a normal growth rate and general dynamics as I mentioned that you know will have a lower than normal growth rate but the sales that they do have I think are very steady. This is a company that has for instance a back log that nearly represents two years with the sales.Jason: So certainly at a 10% rate theres a lot of room for a few bumps in the road along the way and youre still getting paid pretty handsomely for that of that price?Paul: Youre absolutely right. Jason: Second one Paul is in the healthcare space also considered to be relatively defensive. Tell us a little bit about that?Paul: Sure Novartis this is a healthcare giant based out of Switzerland and they are in all sorts of healthcare arenas whether its a vaccines, pharmaceuticals consumer products devices they have, they basically cover the water front in health care and this one has a free casual yield thats a little bit lower than some of the most attractive or highest free casual yields. The free casual yield is only about 8% for this company but I think that this is still a very attractive price for this given the very defensive business that theyre in as well as a fact that they should have a fairly handsome growth rate going forward somewhere in the mid to high single digit range. And again, it has a wide mode healthy balance sheet I think that it is a very attractive trade off between potential return and the risk which is quite low.Jason: Sure last one Paul for investors might be willing to take on a little bit more risk what the recent past has been a little rocky from a regulatory standpoint. Its in the form of profit educations can you tell us a little bit about that one.Paul: Sure Apollo education and youre absolutely right the last couple of years have been very rocky for all the for profit education companies but its funny if you look at the financial statements of these firms and you didnt pay attention to headline changes, you just had the financials, you would think that these are just phenomenal businesses with very high growth rates, high returns on capital, very profitable businesses but again its been a very rocky in the headlines and some concern about whether the government is going to crack down on these but the price thats available on the market again takes those factors and magnifies it to two large degree. Apollo education, the free cash flow yield here is just under 11% today and that is for a company that has had a growth rate in excess of 20% for the last couple of quarters and also has a sparkling balance sheet a couple of dollars a share in cash in net cash and very high returns on capital.Jason: So with a potential growth rate like that certainly some risks that you had to keep on the radar that you want to be aware of but at that price just looking pretty compelling.Paul: I think you hit the nail right in the head there.Jason: Well Paul thank you so much for talking a little bit about this very interesting data point and for these specific ideas.Paul: Thanks for having me.Jason: For Morningstar Im Jason Stipp thanks for watching.