This article looks at UK companies which are generating a lot of cash in relation to their share price. Often referred to as free cash flow yield, this overlooked metric is becoming more important in a world of higher interest rates.
With UK 10-year bond yields rising by 0.8% since the start of the year to around 5.2%, investors can earn a higher yield from bonds than they would get from dividends by investing in the FTSE 100 index, which has a forecast yield of just over 3%.
This represents a meaningful shift from the low-interest rate environment in the decade following the financial crisis in 2008 when the dividend yield on the FTSE 100 was consistently above the yield available on 10-year gilts.
This changes how investors assess higher risk and lower risk investment opportunities. We saw this in 2022 when stocks with the highest PE (price to earnings) ratios underperformed those with lower PE ratios.
In a higher rate environment, dull, unglamorous cash-generative businesses can become more attractive to investors than ‘jam tomorrow’ stocks promising growth far in the future.
What is free cash flow?
Free cash flow is the amount left over after paying for all expenses, interest and capital expenditures. Cash flow is harder to manipulate than earnings per share and book value, which makes it useful to investors.
Price to free cash flow can be turned upside down to be expressed as a free cash flow yield. This tells you what percentage a company’s free cash flow would be relative to its share price. For example, home furnishings retailer Dunelm generated free cash flow per share of 112p in 2025, which means at a recent price of 786p, it has a yield of 14% (112 divided by 786 expressed as a percentage).
Theoretically this means Dunelm can use the cash to buy back 14% of its shares each year, boosting earnings per share. Or the money could be used to reduce debts, pay progressive dividends or make acquisitions to grow the business.
Cash flows can be ‘lumpy’ from year to year because they are less affected by accounting rules which attempt to smooth metrics like earnings per share.
Therefore, it is important to assess whether free cash flow has been boosted by temporary one-off factors. High free cash flow yields can indicate the market is sceptical that current free cash flow levels can be maintained or they could indicate potential bargains.
The sustainability of free cash flow is more important than the size of the yield, and like any valuation metric, it is only a starting point to conduct further research.
How did we find high free cash flow yield UK stocks?
We screened the FTSE 350 index for companies with a price to free cash flow lower than 19 times, which represents a yield of 5.3%, matching the recent 10-year gilt yield. We eliminated companies which didn’t pay a dividend and where earnings per share didn’t cover the dividend by at last 1.2 times. We stipulated a five-year average return on equity of at least 15%.
Return on equity (net profit divided by shareholders equity) shows how efficiently a company uses shareholders’ equity (essentially a company's assets minus its liabilities) to generate profits. Lastly, we removed stocks which have not grown free cash flow by more than 5% a year over the last five years.
Harbour Energy
On the face of it Harbour Energy has a high free cash flow yield, which reflects strong near-term cash generation, driven by higher energy prices. The company recently guided for free cash flow of $1.8 billion, which has tripled over the last year.
Harbour has indicated it expects to spend a good chunk of free cash to sustain production at the current scale, while paying off debts in relation to the $3.2 billion acquisition of deep water Gulf of Mexico operator LLOG.
Alongside elevated uncertainty over volatile energy prices, investors have worries about the sustainability of this free cash flow level and the likelihood it would be used to increase shareholder returns.
Serco
Government services outsourcer Serco is a good example of the lumpiness of free cash flow with 2026 first half free cash flow declining due to timing in cash collections. Serco expects to covert at least 80% of trading cash into free cash, in line with its medium-term goals.
The company reiterated guidance for £160 million of free cash flow which implies a free cash flow yield of 6.5%, above the 10-year gilt yield. Serco increased its share buyback to £150 million from £75 million and hiked the dividend by 10%.
Hollywood Bowl
The UK’s largest tenpin bowling operator, Hollywood Bowl, sits on a double-digit free cash flow yield.
The company raised its first half dividend by 10% and initiated a new £5 million share buyback alongside plans to accelerate the opening of new bowling centres in Canada from 2027.
Hollywood Bowl finished the half with net cash of £26 million and looks to have the capacity to grow its UK and Canadian centres while delivering progressive dividends and share buybacks.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...