4 Bargain Stocks With Top Free Cash Flow Yields

Tickers in this article: ETFC GME PRU XRX
NEW YORK ( Stockpickr) -- In the past few years, we've read countless reports about the still-struggling U.S. consumer. Hopes are rising that 2013 will be a better year for consumers, but we're not exactly on the cusp of a truly healthy consumer economy where all people feel a greater sense of financial well-being.

In corporate America, it's an entirely different story. By many measures, a wide range of companies are generating near-record profit margins, and cash continues to pile up on corporate balance sheets.

>>4 Loser Stocks Poised for a Comeback in 2013

To be sure, many stocks have surged in value in recent years and aren't necessarily deep bargains in the context of their cash flow prowess. However, there are a handful of stocks in the S&P that produce prodigious amounts of free cash flow (defined as operating cash flow minus capital spending) yet have a market value that is still quite low in relation to that cash flow.

Here are four stocks that sport free cash flow yields (which is free cash flow divided by market value) in excess of 7%.

>>5 Rocket Stocks Ready for Blastoff

Xerox

This office equipment maker could have been a candidate for the trash heap by now, were it not for savvy moves to shore up its balance sheet and a game-changing acquisition. Xerox (XRX) acquired business services company Affiliated Computer Services in 2009, and that move is now paying off handsomely.

How do we know? Because Xerox has now become a veritable cash cow, churning out impressive amounts of free cash flow. Over the past four years, Xerox has generated a cumulative $6.8 billion in free cash flow, or roughly $1.7 billion per annum. The entire company is valued at just $10 billion, which equates to a free cash flow yield of 17%. That's almost hard to fathom at a time when most other companies sport free cash flow yields in the 3% to 4% range.

To take advantage of the low valuation assigned to its shares, Xerox bought back more than $1 billion in shares in 2012, and will likely keep shrinking the supply of stock.

E*Trade

Online brokers are a fortunate lot. They get to charge $5 or $10 for every trade they complete for clients, but since it's all done by computers, they don't really need to spend very much on personnel to complete all of those transactions.

That's a lesson that should have been heeded by E*Trade (ETFC) , which foolishly ventured into the mortgage underwriting business in the past decade -- with disastrous consequences.

These days, E*Trade has returned to its roots, wisely focusing only on online trading. And the company again proves what a good business that is. Over the past three years, free cash flow has steadily risen, moving just above $1 billion in 2011. (2012 free cash flow figures won't be revealed until the company files its 10-K).