Cold, hard cash is real, and can be used by shareholder-friendly management teams to:
- Pay dividends.
- Repurchase shares.
- Grow the business organically.
Investing legend and Berkshire Hathaway CEO Warren Buffett is famous for his love of businesses that produce cash flow.
Let’s 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 US$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 fuel shareholder-friendly actions for the foreseeable future.
In the most recent quarter, Chevron announced it would reinstate its annual buyback program due to a combination of improved operational performance and lower spending.
The stock currently offers a dividend yield of 5.6%.
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With whopping free cash flow margins above 30%, credit ratings leader Moody’s is next on our list.
Moody’s shares have performed consistently well during the pandemic, up about 85% over the past two years, suggesting 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 US$2.2 billion in trailing 12-month free cash flow. And over the first half of 2021, the company has returned US$735 million to shareholders through share repurchases and dividends.
The company has a dividend yield of 0.7%.
Rounding out our list is beverage giant Coca-Cola, which produced US$8.8 billion in trailing 12-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 US$10.1 billion, up from the same period in 2019, driven largely by an 18% jump in global unit case volume. If you haven't done any single-stock investing, you could consider using an app that lets you invest for free.
Coca-Cola shares offer a dividend yield of 3%.
Wealthsimple x MoneyWise
Find your (cash) flow
Looking to drum up dividends of your own? Have a look at some other investing options.
Even if you only have a modest investing budget, you may want to use an investing app that allows you to buy “slices” of shares of big-name stocks — especially one that comes with no fees or commissions.
And, those looking to take control of their investments should certainly explore online trading platforms. The best sites offer resources and tools to help investors make informed decisions as they build and manage their investment portfolios.
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