One of the keys to becoming a successful investor is to find stocks that are considered cash cows. One of the most successful investors ever is Warren Buffett. He is one of the wealthiest people in the world, and he did it by spending his career picking cash cow-type stocks. In simple terms, his investment philosophy centers on recognizing a company’s ability to make money. He does not try to predict if or when the market will recognize the value of that company. Some of the things he looks for in a company include:
• A positive return on equity over the past five to ten years
• Very low debt to equity
• High and increasing profit margins for at least the past five years
• A company that has been in business for at least ten years
• A company with a wide economic moat such as name recognition or a product or service that separates them from their competitors
• A stock price that is at least 25% below the company’s intrinsic value
The last requirement is a little more complex to figure out and is beyond the scope of this article. Below are three companies that are not in Warren Buffett’s portfolio, but meet the requirements of a cash cow stock.
Google and YouTube have international name recognition, and Alphabet owns both companies. Google is the most popular search engine and most visited web page on the internet. Google has helped its parent company Alphabet reach a market cap of $800 billion through its advertising revenue. Alphabet also dominates the online video industry through its ownership of YouTube, which generates $9 billion per year in advertising revenue. In one recent quarter, Alphabet generated $27.2 billion in advertising revenue. The company also has around $102 billion in cash and marketable securities, and its debt is less than $4 billion.
This company also has international name recognition. McDonald’s is best known for its hamburgers and fries, but the company makes its money on its franchise business model and on the real estate that has a McDonald’s restaurant. McDonald’s has a 2017 operating margin of 41.9%, which is higher than Alphabet’s 2017 operating margin of 26.1%. The company has $8 billion in before-tax income and $2.7 billion in cash-on-hand. This difference is the result of McDonald’s paying its shareholders a current dividend yield of 2.38%. McDonald’s has increased its dividend for 42 straight years, which is a sign of its cash cow status.
Philip Morris International
Tobacco and cigarettes may be out of fashion, but this hasn’t had too much of an effect on Philip Morris’s bottom line. In fact, when Philip Morris was a part of Altria, its stock was the top performing stock from 1965 to 2015, which includes dividend payments. Philip Morris has name recognition with its top-selling cigarette Marlboro, the cigarettes are inexpensive to make, and they are highly addictive. The company’s 2017 operating margin was 15.3% despite the high international excise tax and burdensome regulations. Without the excise tax and regulations, Philip Morris’s operating margins would be around 40%.
Josh Gruss is the Chairman, CEO and founder of Round Hill Music. Prior to founding Round Hill Music, from 2002 to 2009, Mr. Gruss worked at Gruss Asset Management where he held various positions of increasing responsibility, most recently as a Partner and member of the investment and executive committees.