close
close

Free Cash Flow Rate Update for Q2 2024 for S&P 500 and Sectors

Posted on by darion

I have updated the free cash flow (FCF) yield for the S&P 500 and all sectors as of August 15, 2024.

We have seen a clear trend in S&P 500 FCF profitability over the past few quarters. At the sector level, there is no clear trend, only mixed signals. FCF profitability increased in four sectors, and decreased in seven – and by varying degrees.

I calculate these metrics using the S&P Global (SPGI) methodology, which sums the individual S&P 500 component values ​​for free cash flow and enterprise value before using them to calculate the metrics. I call this the “Aggregate” methodology.

This report is based on the latest available audited financial data, which in most cases is 2Q24 10-Q. Price data is as of 8/15/24. QoQ analysis is based on change from last quarter.

The report leverages my company’s cutting-edge Robo-Analyst technology to provide credible, high-quality fundamental research and support more cost-effective due diligence.

A Brief Review of Selected Sectors of the S&P 500

Investors are receiving the highest FCF per dollar invested in the Telecommunications Services sector as of 8/15/24. On the other hand, the Real Estate sector has the lowest FCF return of all S&P 500 sectors.

To give you an idea of ​​what I show in the full report, I have included a snippet below about the real estate sector.

The full report includes detailed information and charts for the S&P 500 and all sectors.

Example Sector Analysis: Real Estate

Figure 1 shows that the FCF yield for the real estate sector increased from 16/05/2024 to 15/08/2024.

Figure 1: Real Estate FCF Yield: December 2004 – 08/15/2024

The August 15, 2024 measurement period uses price data from that date and includes financial data from the 2Q24 10-Qs because that is the earliest date for which all 2Q24 10-Qs were available for the S&P 500 Index components.

Figure 2 compares trends in operating cash flow (FCF) and enterprise value for the real estate sector since 2004. I arrive at these numbers by adding the free cash flow and enterprise value of individual S&P 500/sector companies. I call this approach the “Aggregate” methodology, and it is consistent with the S&P Global (SPGI) methodology for these calculations.

Figure 2: Real Estate Cash Flow and Enterprise Value: December 2004 – 15/08/2024

The August 15, 2024 measurement period uses price data from that date and includes financial data from the 2Q24 10-Qs because that is the earliest date for which all 2Q24 10-Qs were available for the S&P 500 Index components.

The Aggregate methodology provides a clear view of the entire S&P 500/sector index, regardless of market capitalization or index weighting, and is consistent with how S&P Global (SPGI) calculates indices for the S&P 500 Index.

To gain additional perspective, I compare the Aggregate method for free cash flow with two other market-weighted methodologies: market-weighted metrics and market-weighted factors. Each method has its advantages and disadvantages, which are detailed in the Appendix.

Figure 3 compares the three methods of calculating FCF returns in the real estate sector.

Figure 3: Comparison of Real Estate FCF Return Methodologies: December 2004 – August 15, 2024

The August 15, 2024 measurement period uses price data from that date and includes financial data from the 2Q24 10-Qs because that is the earliest date for which all 2Q24 10-Qs were available for the S&P 500 Index components.

Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation for writing about a specific genre, style, or topic.

Appendix: Analysis of FCF Trailing Rate of Return Using Different Weighting Methodologies

I derive the above metrics by summing the individual S&P 500/sector component values ​​for free cash flow and enterprise value to calculate FCF yield. I call this approach the “Aggregate” methodology.

The Aggregate methodology provides a clear view of the entire S&P 500/sector index, regardless of market capitalization or index weighting, and is consistent with how S&P Global (SPGI) calculates indices for the S&P 500 Index.

For additional perspective, I compare the Aggregate method for free cash flow to two other market-weighted methodologies. These market-weighted methodologies add more value to metrics that don’t include market values, such as ROIC and its drivers, but I still include them here for comparison:

Market-weighted indicators – calculated by weighting the market capitalization of the backwardation FCF yield for individual companies relative to their sector or the entire S&P 500 in each period. Details:

  1. The weight of a company equals the market capitalization of the company divided by the market capitalization of the S&P 500/its sector
  2. I multiply each company’s FCF income by its weight
  3. The FCF return of the S&P 500/sector index is equal to the sum of the weighted FCF returns of all companies in the S&P 500/sector index

Market weighted factors – calculated by weighting the market capitalization of FCF and enterprise value for individual companies in each sector for each period. Details:

  1. The weight of a company equals the market capitalization of the company divided by the market capitalization of the S&P 500/its sector
  2. I multiply each company’s free cash flow and enterprise value by its weighting
  3. I sum the weighted cash flow from equity and weighted enterprise value for each S&P 500 company/sector to determine the weighted cash flow from equity and weighted enterprise value for each sector
  4. The S&P 500/Sector FCF Return equals the weighted S&P 500/Sector FCF divided by the weighted S&P 500/Sector Enterprise Value

Each method has its advantages and disadvantages, which are presented below:

Aggregation method

Advantages:

  • A direct look at the entire S&P 500/sector index, regardless of company size or shareholding.
  • Consistent with the way S&P Global calculates the multiples for the S&P 500 Index.

Defects:

  • Vulnerable to firms entering/leaving a group of firms, which may unfairly affect totals. Also susceptible to outliers in any period.

Market-weighted indicators method

Advantages:

  • Takes into account a company’s market capitalization relative to the S&P 500/sector index and weights its metrics accordingly.

Defects:

  • Vulnerability to outlier performance that could have a disproportionate impact on overall FCF profitability.

Market-weighted driver method

Advantages:

  • It takes into account a company’s market capitalization relative to the S&P 500/sector index and weights its free cash flow and enterprise value accordingly.
  • Mitigates the disproportionate impact of one company’s outlier performance on overall results.

Defects:

  • Greater volatility as it places emphasis on large changes in operating cash flow (FCF) and enterprise value for large equity firms.