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Most financial analysts agree that free cash flow is an important indicator of a firm's financial health and its ability to sustain upward growth in earnings. In this study, I evaluate its effectiveness as a priced in factor in the cross section of returns. Focusing on the DOW Jones 30 stocks over the period 2007-2013, I develop portfolio weights for each DOW Jones stock based on free cash flow per share or price to free cash flow per share. Two weighting models are used: (1) higher weights are given to higher levels of cash flow per share, and (2) higher weights are given to the inverse of price to cash flow per share. The performance of the free cash flow per share weighting models are then compared to the price weighted DOW Jones on an annual basis for the highly volatile market period of 2007-2013. If free cash flow is a priced in factor, I would expect the free cash flow weighting models to consistently generate excess returns over the benchmark DOW.
Trevor C Collier
Primary Advisor's Department
Economics and Finance
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Fitzmartin, Sean Michael, "Is Free Cash Flow a Priced in Factor in Explaining the Performance of the Dow 30 Stocks? A Study in Portfolio Weighting, 2007-2013." (2015). Stander Symposium Posters. 625.
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