5 Cash Cows at Great Prices
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I've always thought that the best quotes are those that are both simple and profound at the same time. . . like this one:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
If you consider yourself to be a value investor and haven't memorized or internalized the above quote, do it now! Over and over I've found this quote to be very true in my investing career. Not only is owning businesses with wonderful economics and wide moats more enjoyable, it is also usually better for your returns in the long haul. But don't take my word for it, let the facts speak for themselves:
It looks like Buffett's approach toward buying wonderful businesses has paid off quite handsomely.
Consider some of the explicit benefits of buying great businesses at fair prices as opposed to buying fair businesses at great prices.
- Less volatility in the long haul: Great businesses are usually considered less risky by Wall Street than other stocks. Because of this, there is usually a lot less buying and selling going on and more holding. This, in turn, means less stress!
- Lower portfolio turnover: Buying great businesses allows you to hold for longer periods of time since you are likely to encounter far fewer negative surprises.
- Less attention needed: Stocks with wide moats don't require as much attention. Since business as usual is considered sustainable for a long period of time you can go on vacation and count on your business to be operating fairly normally when you return.
One way to find businesses that are likely to have wide moats is to do a screen, searching for businesses with over 10 years of positive, growing free cash flow. This screen brings to light several important criteria:
- A business model that currently produces free cash flow for management and shareholders.
- A business model that can consistently produce free cash flow (even through a recession).
- A business model that can create value with free cash flow and use that value to create increasingly more free cash flow for owners and shareholders.
Businesses that meet the three criteria above are usually both fun and profitable to own over the long haul. But there is still one more thing we need to factor in: Price! To this end, I've found five companies that meet the above requirements and also trade at relatively high free cash flow yields: Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Oracle (NASDAQ: ORCL), Abbott Laboratories (NYSE: ABT), and Johnson & Johnson (NYSE: JNJ).
Below is a chart representing the free cash flow yield of these companies. Interestingly, their free cash flow yield has generally increased over the last 10 years, meaning great businesses like these are available at a price (relative to value) that is fairly cheaper than a decade ago.
AAPL Free Cash Flow Yield data by YCharts
Not only are these companies' free cash flow yields high, but their free cash flow is generally on the rise over the last 10 years, especially Apple:
AAPL Free Cash Flow TTM data by YCharts
So, we are left with five excellent, wide-moat, cash cows at a reasonable price. You can't get much better than that! What cash cows did I miss?
DanielSparks owns shares of Apple. The Motley Fool owns shares of Apple, Abbott Laboratories, Johnson & Johnson, Microsoft, and Oracle. Motley Fool newsletter services recommend Apple and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
