Microsoft, a top pick outlined in the article, is an example of a company that meets the competing demands of internal managers, shareholders and debt holders. For the twelve months ending March 31, 2015, by my calculations, Microsoft had free cash flow ("FCF") of around $26B ($32B cash from operations less $6B capital expenditures). The company spent $9B on acquisitions, bought back $11B of shares, and paid $10B in dividends. Given the low interest rates, they financed some of these expenditures by issuing net new debt of around $10B. Looking at their balance sheet on March 31, 2015, Microsoft was in the enviable position of having about $95B in cash and short-term investments, compared to total funded debt of approximately $32B. One of the risks a cash generator like Microsoft faces, not covered in the article, is repatriating cash from overseas into the US. However, with interest rates at their current low levels, it probably makes more sense for Microsoft to keep issuing debt in order to meet any short-term US cash needs (i.e. funding dividends and buybacks).
The article also makes light of the price to FCF ratio as a way to screen potential investments. For fun, I ran some screens to identify cheap price/FCF companies on the US and Canadian exchanges. In Canada, the cheapest companies based on the price/FCF ratio were Power Corporation (POW), Manulife Financial (MFC), and Power Financial Corporation. Interestingly, their dividend yields are 3.5%, 2.8%, and 4.0% respectively. In the US, the cheapest companies based on FCF were Ares Management (ARES), Annaly Capital Management (NLY) and Prudential Financial (PRU). Their respective dividend yields were 5.3%, 11.9% and 2.8%. Microsoft was the 108th cheapest company based on FCF, appearing after familiar names such as Ford (#30), Apple (#58), and Cisco Systems (#87). The lists contain many financial companies, some private equity funds, and a fair amount of technology companies.
Is there value in identifying cheap price/FCF companies? Based on my initial screens run for North American companies, I think the jury is still out.