Lay Off the Stocks

If you had $20 billion, you could put it in Treasury bills, risk-free, and get about $200 million at 1% interest. But let's say you wanted to make more than $200 million a year.

Let's pretend that you have enough money to buy all of Wal-Mart (WMT - commentary - Cramer's Take) and take it private. First, you would look at free cash flow -- cash that is left over after paying all expenses, salaries and interest on loans, as well as repairing old facilities and expanding operations.

Have you ever worked for a place where management refused to put in new carpets or give the office a fresh coat of paint? That's because it was trying to keep expenses down and milk things for as long as they could -- in essence, keeping free cash flow as high as possible.

Taking its cash flow from operations and subtracting capital expenditures (according to Yahoo! Finance), Wal-Mart had $5.42 billion in free cash flow as of last Thursday. Capital expenditures are increases in plant, property and equipment (PP&E).

If all of Wal-Mart's stock outstanding is worth $197 billion, you would take the free cash flow and divide it by its market cap. This gives you a free cash flow yield of 2.75%, which beats a T-bill yield. If Wal-Mart's stock drops by 50% and its free cash flow stays the same, its new yield is 5%. With the money left over, Wal-Mart can pay a dividend or buy another company, thus increasing its free cash flow even more.

For a higher rate of return on our money, Exxon Mobil (XOM - commentary - Cramer's Take) had a free cash flow of $36.6 billion and a market cap of $360 billion as of last Thursday. It's free cash flow yield is 10.2%.

Of course, Exxon is a moving target: Its product, oil, is hard to predict. As a matter of fact, Exxon's free cash flow will be lower this year because its earnings will be lower. Oil is in the $30s and $40s so far, not like last year, when oil got to almost $150 a barrel.

---

At the time of publication, Osborne had no positions in the stocks mentioned.

Holmes R. Osborne III is a private money manager, founder of investment newsletter StockRoyalty.com and frequent author of financial columns. He has a degree in finance from the Martin J. Whitman School of Management at Syracuse University and is a CFA charter holder. Osborne is a member of the Pacific Council on International Relations, Malibu Rotary, Business Forum International and was formerly on the board of the L.A. National Association of Business Economists. He spoke this year at the fifth annual Value Investor Conference.