Bank of America Highlights High-FCF Dividend Stocks as Tech-Driven Market Reaches Record Valuations

Investors navigating a market near record highs should prioritize quality equities, according to Bank of America. While volatility has characterized the year, equities remain richly valued. On Monday, the S&P 500 rose more than 1%, driven by a surge in AI-related stocks. However, high free cash flow has been the strongest performing factor over the past 30 years, strategist Jared Woodard noted in a Sept. 9 research note. The firm identified free cash flow yield as the best quality metric because it is difficult to manipulate and remains comparable across companies.

“Firms that can generate steady cash have been rewarded by investors because they have the flexibility to invest for the future, pay down debts, and return capital to shareholders as needed,” Woodard said. He noted that the S&P 500’s free-cash-flow yield is at record lows, as tech companies spend billions and take on debt to maintain AI market share. Amazon, Alphabet, Meta Platforms, Microsoft, and Oracle are expected to post negative free cash flow of $141 billion over the next 12 months.

“Buy what is scarce,” Woodard wrote, pointing out that high-FCF stocks are up 43% year to date and are on pace for a record.

Bank of America highlighted several quality, non-AI companies rated as buys, all with strong free cash flow and solid dividends:

Allstate leads the dividend payers with an 18% free-cash-flow yield, a 1.8% dividend yield, and roughly 17% gains year to date. The insurer beat second-quarter expectations with adjusted earnings of $8.99 per share versus a $6.06 consensus. Bank of America maintains a buy rating, while the broader analyst consensus holds a hold, with price targets suggesting more than 12% upside.

Cigna also made the list, with analysts rating it overweight and consensus price targets pointing to 24% upside. The health insurer posted a Q2 earnings and revenue beat and raised full-year adjusted EPS guidance to $30.45, in line with expectations. The stock is slightly down for the year and yields 2.3%.

Hasbro carries an average buy rating with 25% upside to consensus price targets. The toymaker’s Q2 adjusted earnings and revenue beat expectations, led by “Magic: The Gathering,” which generated quarterly revenue above $500 million for the first time in its 30-year history. Hasbro pays a 3.2% yield and is up around 7% year to date.

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