Cash Flow 101: Morningstar, Moody's, CME

MORN doesn't yet pay a dividend and has no long-term debt outstanding. The company has made some smart acquisitions to broaden its product portfolio, but we hope to see a dividend at some point. As of March 31, MORN had $4.40 per share in cash just sitting on the balance sheet. I wish it would give some of that to shareholders in the form of a special dividend.

Chicago Mercantile Exchange(CME Quote): CME currently has a free cash flow yield of between 27% and 30% (the last three quarters), and it has consistently been greater than 25% since CME came public in late 2002. The dividend yield is still below 1%, but CME management boosted the quarterly dividend just recently from 86 cents to $1.13. The acquisitions of the old Chicago Board of Trade and now the New York Merc have been done with a combination of cash and stock. The stock hasn't traded well since February. Let it bottom first.

Moody's: Like finding out the pretty girl in your senior high school class has extraordinarily bad breath, one of the best business models and one of the best financial stocks this decade has taken gas on the subprime issue, thanks to the failure of the rating models. Be careful shorting this stock, since the free cash flow yield on MCO has been between 25% and 35% for the last three years.

MCO pays a small dividend of just 32 cents per year, but it has been buying back stock religiously since it came public. With analyst compensation being the real fixed cost in the model, MCO has tight control over compensation expenses, and if it moves to a ratings model that is more "implied" or "market spread-driven," analysts could become less important to the model. This stock is a very tempting long in the low $30s.

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