Wall Street pays a ton of attention to company earnings.
But reported earnings are often manipulated through aggressive or even fraudulent accounting methods.
That’s why risk-averse investors need to focus on companies that generate gobs of free cash flow.
Cold, hard cash is real, and can be used by shareholder-friendly management teams to:
Investing legend and Berkshire Hathaway CEO Warren Buffett is famous for his love of cash flow-producing businesses.
Let’s take a look at three stocks in Berkshire’s portfolio that boast double-digit free cash flow margins (free cash flow as a percentage of sales).
Leading off our list is oil and gas giant Chevron, which has generated $11.2 billion in free cash flow over the past 12 months and consistently posts free cash flow margins in the ballpark of 10%.
The shares have been sluggish in recent months on continued weakness in energy prices, but contrarian investors might want to take a closer look.
Management’s recent initiatives to cut costs and improve efficiency are starting to take hold and should be able to fuel shareholder-friendly actions for the foreseeable future.
In the most recent quarter, Chevron announced that it would reinstate its annual buyback program due to a combination of improved operational performance and lower spending.
“Our free cash flow was the highest in two years due to solid operational and financial performance and lower capital spending,” said Chairman and CEO Mike Wirth. “We will resume share repurchases in the third quarter at an expected rate of $2-3 billion per year.”
The stock currently offers an attractive dividend yield of 5.6%, which investors can pounce on using just their spare change.
With whopping free cash flow margins above 30%, credit ratings leader Moody’s is next up on our list.
Moody’s shares have performed consistently well during the pandemic, up about 85% over the past two years, suggesting that it’s a recession-proof business worth betting on. Specifically, the company’s well-entrenched leadership position in credit ratings, which leads to outsized cash flow and returns on capital, should continue to limit Moody’s long-term downside
Moody’s has generated about $2.2 billion in trailing twelve-month free cash flow. And over the first half of 2021, the company has returned $735 million to shareholders through share repurchases and dividends.
“Moody’s impressive second quarter 2021 results reflect the strong demand for our increasingly comprehensive suite of risk assessment offerings as we help our customers make better decisions about a wider range of risks,” said President and CEO Rob Fauber in the company’s most recent earnings release.
Moody’s has a dividend yield of 0.7%.
Rounding out our list is beverage giant Coca-Cola, which has produced $8.8 billion in trailing twelve-month free cash flow and habitually delivers free cash flow margins above 20%.
The stock has been sluggish over the past several weeks, providing long-term investors with an enticing entry point. Coca-Cola’s long-term investment case continues to be backed by an unrivaled brand presence, massive scale efficiencies, and still-attractive geographic growth tailwinds.
And the company is back to operating at pre-pandemic levels.
In the most recent quarter, Coca-Cola posted revenue of $10.1 billion, up from the same period in 2019, driven largely by an 18% jump in global unit case volume.
“Our results in the second quarter show how our business is rebounding faster than the overall economic recovery, led by our accelerated transformation,” said Chairman and CEO James Quincey. “As a result, we are encouraged and, despite the asynchronous nature of the recovery, we are raising our full year guidance.”
Coca-Cola shares offer a dividend yield of 3%.
Real estate cash flow
Even if you don’t like these specific stock picks, you should still look to implement Buffett’s time-tested strategy of investing in real businesses that produce cold, hard cash.
And you don’t have to limit yourself to the stock market.
For instance, some popular investing services make it possible to lock in a steady rental income stream by investing in premium real estate properties — from commercial developments in LA to residential buildings in NYC.
You’ll gain exposure to high-end properties that big-time real estate moguls usually have access to, and you’ll receive regular payouts in the form of quarterly dividend distributions.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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