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Warren Buffett is holding these stocks for monstrous free cash flow — why you should too

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·4 min read
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Warren Buffett is holding these stocks for monstrous free cash flow — why you should too
Warren Buffett is holding these stocks for monstrous free cash flow — why you should too

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 it’s 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 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).

One — or all — of them could be worth gobbling up with your spare change.

Chevron (CVX)

Chervon gas station canopy and sign.
Ken Wolter/Shutterstock

Leading off our list is oil and gas giant Chevron, which has generated $11.3 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 rallied in recent months on the strong rebound in energy prices, but long-term investors might still want to have a 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.

Despite the runup, Chevron shares still offer an attractive dividend yield of 4.9%, higher than that of close rivals BP (4.4%) and ConocoPhillips (2.5%).

Of course, if you're still on the fence about the energy space, some investing apps will give you a free share of Chevron or Conoco just for signing up.

Moody’s (MCO)

Moody's logo on new office building
Andrius Zemaitis/Shutterstock

With whopping free cash flow margins above 30%, credit rating leader Moody’s is next up on our list.

Moody’s shares performed well during the pandemic, up about 65% over the past two years, suggesting that it’s a recession-proof business worth betting on.

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.

To be sure, Moody’s shares have nearly tripled over the past five years and now trade at around $375. But you can get a piece of the company using a stock trading app that allows you to buy fractions of shares with as much money as you are willing to spend.

Coca-Cola (KO)

Various type of Coca Cola drinks. Coca Cola drinks are produced and manufactured by The Coca-Cola Company
MAHATHIR MOHD YASIN/Shutterstock

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 few months, 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.

Coca-Cola shares offer a dividend yield of 3.1%, higher than that of other beverage giants like Pepsico (2.7%) and Constellation Brands (1.4%).

Socks or stocks?

Even if you don’t agree with Buffett on these specific stocks, you should still implement his time-tested strategy of buying high-quality assets at good prices.

Of course, you can apply this value-oriented approach in everything you do — not just investing.

For example, a free browser application allows you to automatically hunt for lower prices and coupons when shopping online.

Because let’s face it: Amazon doesn’t always have the best prices.

It’s free to use and takes seconds to set up.

As Buffett once said, “Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.