Jul 20, 2022
While we adhere to strict editorial guidelines, partners on this page may provide us earnings.
Wall Street pays a ton of attention to company earnings.
But reported earnings are often manipulated through aggressive or even fraudulent accounting methods.
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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:
- Pay inflation-fighting 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).
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Chevron (CVX)
Leading off our list is oil and gas giant Chevron, which has generated $21.5 billion in free cash flow over the past 12 months and consistently posts free cash flow margins in the ballpark of 12%.
The shares have been hot in recent months on the strong rebound in energy prices, but with inflation continuing to heat up, there might be plenty of room left to run.
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.
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In March, Chevron announced that it would double its share buyback to as much as $10 billion a year, promising that shareholders will see the benefits of high oil prices.
The stock still offers an attractive dividend yield of 3.9%.
Moody’s (MCO)
With whopping free cash flow margins above 30%, credit ratings leader Moody’s is next up on our list.
Despite weakness in 2022, Moody’s shares are up 120% over the past five years, suggesting that it’s a relatively recession-resistant 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
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Moody’s has generated about $1.9 billion in trailing twelve-month free cash flow. And in 2021, the company returned $1.2 billion to shareholders through share repurchases and dividends.
Moody’s has a dividend yield of 1.0%.
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Coca-Cola (KO)
Rounding out our list is beverage giant Coca-Cola, which has produced $7.8 billion in trailing twelve-month free cash flow and habitually delivers free cash flow margins above 20%.
The stock has had plenty of ups and downs in recent months, but patient investors should look to take advantage of the short-term uncertainty. 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 $10.5 billion, up 16% from the year-ago period, driven largely by a 8% increase in unit case volume.
Coca-Cola shares offer a dividend yield of 2.9%.
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Brian is an editor for Moneywise. A long-time stock junkie, his work has appeared in The Motley Fool, Seeking Alpha, and Yahoo Finance. He believes in owning "Forever Stocks" — a rare group of businesses that have paid out dividends for decades. Brian holds the Chartered Financial Analyst (CFA) designation.
