6 Stocks with Dangerous Free Cash Flow Trend – Should you Sell them or Buy More? [Podcast]

Why Free Cash Flow Isn’t a First-Layer Filter

Free cash flow (FCF) can be a fantastic “reality check”… but it can also be wildly volatile and misleading if you use it too early in the process.

• FCF per share can be a useful alternative to EPS because EPS includes accounting items (amortization, impairments) that don’t affect cash.

• The problem: FCF doesn’t always tell the full financing story (especially when big projects are funded with debt).

• Mike’s approach:

  • Layer 1: Dividend Triangle (revenue, earnings, dividend growth)

  • Layer 2: cash flow metrics (operating cash flow + free cash flow), CapEx, debt trend, payout ratios

  • Layer 3: valuation metrics (yield vs 5-year average, P/E history, etc.)

Operating Cash Flow vs Free Cash Flow

Mike draws a clean line between “cash power” and “cash left over.”

• Operating cash flow (OCF): the cash generated by core business activity.

• Free cash flow (FCF): OCF minus CapEx — what’s left after reinvesting to maintain/grow the business.

• Why it matters:

  • A company can have rising OCF and falling FCF if CapEx is ramping up.
  • That can be healthy (investment phase) or dangerous (spending without payoff).

How to Read a “Dangerous” Trend Without Overreacting

A declining line on a chart is a red flag, not a decision by itself. The goal is to identify the reason behind the trend.

• Use TTM (12-month trailing) data instead of quarter-to-quarter noise.

• Expect volatility in:

  • cyclical businesses
  • seasonal businesses
  • companies with large, lumpy investment cycles

• A dip is a prompt to ask: Is this strategic spending… or deteriorating economics?

Case Studies: When Falling FCF Is Explainable (and Maybe Even Strategic)

Several examples show how heavy investment can temporarily crush FCF—even when the business is still solid.

• Pepsi (PEP)

  • Large recurring CapEx (multi-billion annually)
  • Productivity investments (automation, digitalization) meant to improve future margins
  • Past one-off tax impact (TCJA-related payment) worsened comparisons
  • Key takeaway: the question becomes “Do you trust the payback?”

• Exchange Income (EIF.TO)

  • Strong Dividend Triangle + rising OCF, but falling FCF
  • Acquisitions + reinvestment (fleet, plants) drive CapEx and higher debt
  • Key takeaway: watch the balance sheet—small caps don’t get much room for mistakes.

• Texas Instruments (TXN)

  • Huge multi-year fab investment plan + intentional inventory build
  • Inventory strategy can be smart, but it’s a “timing game” if demand doesn’t rebound as expected
  • Key takeaway: FCF declines can be a deliberate trade-off during capacity cycles.

Case Studies: When Falling FCF Signals a Harder Problem

Other examples highlight FCF weakness tied to margin compression and execution risk—where time alone doesn’t fix the issue.

• Mondelez (MDLZ)

  • Revenue growth isn’t translating into earnings/FCF strength
  • Cocoa costs squeeze margins with limited “plan B”
  • Key takeaway: inflation in key inputs can become a structural drag, not a temporary dip.

• Nike (NKE)

  • Headwinds + strategic reset after a push toward DTC
  • Spending heavily to rebuild wholesale relationships, clear inventory, invest in marketing/supply chain
  • Key takeaway: turnaround plans can justify weaker cash flow—but outcomes vary and patience gets tested.

• Air Products & Chemicals (APD)

  • Massive hydrogen CapEx plan funded with more debt
  • Mike flags a qualitative issue: management’s dividend decision logic felt improvised
  • Key takeaway: falling FCF + rising debt + shaky capital allocation messaging is a tough combo.

A Practical “Cash Flow Red Flag” Checklist

Mike closes with a simple framework to avoid blind decisions.

• Focus on TTM numbers first.

• Identify the story:

  • Investing for the future? (CapEx ramp, strategic expansion, productivity projects)
  • Economic deterioration? (margi n squeeze, input cost shock, weaker pricing power)

• Cross-check with:

  • Dividend Triangle
  • debt trend
  • management’s capital allocation track record

• Use AI carefully:

  • upload the company’s quarterly/annual PDF
  • ask questions only about that document
  • request the page number/source for any key claim

Related Content

This episode is a numbers- and strategy-focused deep dive into TELUS, right as earnings drop. Mike explains why TELUS used to be an attractive mix of a telecom cash cow plus “tech-like” growth segments—but why that story has become far less convincing as revenue stagnates, debt pressure remains high, and dividend growth has been paused.