Sticking With Wells Fargo and Cisco

NEW YORK (TheStreet) -- This is the year for preserving capital (not losing money) and being an exceptionally smart investor.

Legendary investment publisher Porter Stansberry recently opined on his version of what a smart investor looks for, especially in this time of unprecedented monetary accommodation by the Federal Reserve.

"Thus, in my Investment Advisory, we judge companies primarily by how efficiently they produce cash. We're interested in how much cash a company generates per unit of sales. And we're interested in how much of this profit is reinvested into the business (through capital expenditures or acquisitions) versus how much is simply returned to the company's real owners - its shareholders," wrote Stansberry.

Successful investors like Warren Buffett and Stansberry would say something similar to, "And we're very interested in the price per share we have to pay to capture our share of the cash the underlying business is producing."

So let's look at the first business I consider a "cash-flow king."

As the late Henny Youngman might have said, "Take Wells Fargo, ( WFC) please!" WFC happens to be my single favorite bank and financial company right now, and there are many reasons why.

One is its ability to generate a wonderful amount of cash from continuing operations through an ever-increasing return on invested capital. The one-year chart below is a good illustration of what I'm describing. Few companies do it better than Wells Fargo. WFC Cash from Operations TTM Chart WFC Cash from Operations TTM data by YCharts

As I wrote in a recent article, "With the Federal Reserve as the 'wind beneath its wings,' the big banks may continue to soar. That's why I'd call Wells Fargo the alpha financial stock for 2013."

Well Fargo's trailing-12-months operating cash flow (as of the quarter ending Sept. 30th) was $26.06 billion. On Friday WFC will report to the world its earnings for the last quarter of 2012. Expectations of the analysts who follow WFC speak to its capital efficiency and cash generating acumen.

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As I wrote in the above referenced article, "EPS for the year (2012) is expected to come in at $3.35, an almost 19% increase over 2011. The final revenue numbers for 2012 should be close to $85.7 billion, which should help boost the operating cash flow and total cash (which stood at $176.43 billion by the end of WFC's last quarter)."

Over the weekend I wrote yet another article in which I referenced one of the greatest investors of all time. This investor sticks to his discipline of buying companies that generate lots of free cash and an outstanding return on invested capital.

In that article I wrote, "And as we all have experienced at one time or another, our emotions and feelings aren't the safest gauges for financial success. That's why the great investors like Warren Buffett remind investors repeatedly to 'Always have a margin of safety, in case something goes wrong' and to 'Decide on your investing values and criteria disciplines and stick to them no matter what!'"

It's no wonder Buffett and his holding company, Berkshire Hathaway ( BRK.B) own over 8% of the outstanding shares of WFC. That equals ownership of nearly 15 billion shares, an example of massive commitment and faith in the company's leadership and goals.

Another example of a "cash-flow king" is Cisco Systems ( CSCO), a technology and networking company that needs no introduction. CSCO will step into the earnings confessional again on Feb. 13.

As of its last quarter ending Oct. 27, CSCO had trailing-12-month operating cash flow of $11.62 billion and operating cash flow of an astounding $45 billion. Its TTM revenue up to that point stood at nearly $47 billion.

When you look at a one-year chart of CSCO and view the amount of cash-from-continuing-operations it has experienced through its ever-increasing return on invested capital you really get the picture. CSCO Cash from Operations TTM Chart CSCO Cash from Operations TTM data by YCharts

Please notice how similar the above chart of CSCO looks to WFC's one-year chart of the same metrics. These levels of capital efficiency allow strong companies like CSCO and WFC to grow organically and by acquisition. It also allows them to pay a generous total return dividend through cash payouts and stock buybacks.

WFC pays an annual 88 cents per share dividend. If you're fortunate and patient enough to buy the stock when it trades for $33 you'll be paid a yield to price of almost 2.7%. That represents a payout ratio of only 25%, and that often indicates that as revenue and total cash grows so will the dividend and the share price.

CSCO's current annual dividend is 56 cents. A purchase price at $19 a share (yes, still possible) would bring a dividend yield to price of nearly 3%, which represents an even more modest payout ratio of 23%. Again, the advantage of buying the "cash-flow kings" is there's continually plenty of money for dividend hikes, accretive acquisitions, stock buybacks and product expansions.

In fact, on Monday CSCO announced "... the expansion of its Linksys Smart Wi-Fi portfolio with three new 802.11ac powered Smart Wi-Fi Routers, a new compact 802.11ac USB adapter, new features and new Smart Wi-Fi Apps. Together, these innovations give consumers a smarter way to control their wireless home network and connected devices.

"With the new Smart Wi-Fi Routers, consumers will enjoy incredibly fast Wi-Fi speeds with exceptional in-house Wi-Fi coverage" according to the company's timely press release.

"Consumers will also notice simplified installation that can be completed in a matter of minutes. Additionally, the routers offer new tools for home network monitoring and control, and new mobile apps for anytime, anywhere remote access of files, photos, videos, music and more. The new Smart Wi-Fi Routers and compact USB adapter are expected to be available in the spring."

Product updates and improvements are a big part of CSCO's game plan to increase earnings and capture more market share. "Cash-flow kings" are usually ahead of the competition and always looking for better ways to serve the customers and please the shareholders.

This year began with prudent investor resolutions like not losing money and buying quality companies when the share price is considered oversold and undervalued. This includes focusing on the ones that are excellent at generating lots of cash and are very efficient in the utilization of that cash.

WFC and CSCO are two examples that fit this description, so the next step is waiting for both to become oversold and undervalued. An old proverb says, "Exceptional patience produces immediate results." The awareness of what to invest in AND what price to pay can be those immediate results. Tally ho!

At the time of publication the author had a position in WFC.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

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