[Editor’s note: “The 8 Best Cash Cow Stocks to Buy for Stable Returns” was previously published in November 2019. It has since been updated to include the most relevant information available.]
One of the most popular investment strategies is to focus on fast-charging growth companies. The appeal, of course, is that you can get in on the ground floor of a paradigm-shifting industry. But remember the adage cash is king. This is particularly crucial given the novel coronavirus pandemic. Right now, the most dependable cash stocks to buy are usually what people call “cash cows.”
While no one will criticize sharply rising growth metrics, cash flow represents a business’ lifeblood. A weakened cash position can lead to severe problems further down the road, even with strong growth. No matter how viable an organization, it must find a way to keep the lights on. That’s why some of the best investments also feature consistent free cash flow.
Another reason to look at a company’s money outflows as opposed to strictly its income statement is flexibility. Simply put, well-financed operations have more options. They can choose to put money to work through key investments, or to expand operations.
As I alluded to above, these attributes have never been more important. With the coronavirus impacting every corner of the global markets, investors have largely prioritized stability. In this environment, cash cows offer a measure of confidence, especially if we suffer a prolonged recession.
Below are the eight best cash cow stocks to buy now:
- McDonald’s (NYSE:MCD)
- Coca-Cola (NYSE:KO)
- Merck (NYSE:MRK)
- Facebook (NASDAQ:FB)
- Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)
- Philip Morris International (NYSE:PM)
- Lockheed Martin (NYSE:LMT)
- Microsoft (NASDAQ:MSFT)
Cash Stocks: McDonald’s (MCD)
I’m going to make a confession straight off the bat. I don’t understand why people eat at McDonald’s, particularly those who do so regularly. Admittedly, they make great coffee and their French fries are to die for, but the rest of it? Not quite so appetizing.
Nevertheless, I don’t need to understand a phenomenon to recognize its incredible popularity. Moreover, those who are looking primarily for reliable stocks to invest in should consider MCD stock.
Now, I’m not under any illusions about the tough circumstances surrounding McDonald’s and fast-food restaurants in general. However, I think it’s fair to point out that the company has worked hard to support its franchisees, though it’s clear that many need more assistance.
But with several states opening up, this should help relieve the pressure. Most notably, California Governor Gavin Newsom announced that some businesses can reopen as early as Friday, May 8. That should go a long way in boosting traffic, which should help support MCD stock.
Additionally, McDonald’s enjoys consistent FCF every year, offering invaluable confidence in an unpredictable market environment. Plus, MCD pays out a 2.83% dividend yield, which investors shouldn’t ignore.
Coca-Cola (KO)
Staying on the junk food theme, investors may want to consider soft drink giant Coca-Cola. During bull markets, KO stock provides consistent passive income with generally steady, though uninspiring returns. But in a bear market, these attributes of stability are what makes Coca-Cola one of the best cash cow stocks to buy.
In the last recession, the company fared well because its underlying products represented a cheap pick-me-up during rough times. And with little in the way of traditional entertainment – no sports, no movies, no traveling – consumers are looking to anything for a quick escape. This narrative may travel further this time around because sodas are cheaper and more convenient than buying a $5 latte at a trendy coffeeshop.
Further, KO stock can directly benefit from the coronavirus. As you know, the lockdowns forced a dramatic paradigm shift for all Americans. Many have turned to eating as a coping mechanism, drawing concerns about longer-term health implications.
It’s likely that these coping mechanisms also involved drinking sugary (read addictive) beverages, which makes Coca-Cola one of the more relevant, though cynical stocks to buy.
Cash Stocks: Merck (MRK)
On the surface, the coronavirus has positive implications for the pharmaceutical industry. But drill into the details and the situation is cloudy. For instance, big pharma outfit Merck has been rather volatile since the beginning of the year. With a focus on oncology and other serious diseases, Merck has found itself in the shadows relative to companies with infectious disease drug pipelines.
However, that doesn’t mean you should ignore MRK stock. Although the coronavirus may stick around with us for a lot longer than we would like, at some point, it will fade. When it does, patients who have been scared away from entering hospitals and clinics for fear of contracting Covid-19 will gradually return. When they do, a demand surge may help lift shares.
Also, keep in mind that prior to the pandemic, several analysts were bullish on MRK stock, particularly because of Merck’s cancer drug Keytruda. Industry research suggested that Keytruda will become the best-selling drug in the world by 2023. Thus, the discount today could turn out to be a huge profit-maker a few years down the line.
Facebook (FB)
As one of the most influential companies in the world, it’s no surprise that Facebook consistently ranks among the best cash cow stocks to buy. As of the latest read, the company has nearly $60.3 billion of cash and cash equivalents. Conversely, it has only $9.5 billion in long-term debt, making FB stock a reliable investment in any circumstance.
However, the present crisis has made the social media giant even more compelling. As the pandemic worsened in the U.S., most states issued shelter-in-place orders. That left millions of Americans devoid of their offline (as in real) social networks, contributing to rising mental health concerns.
True, almost all states are now implementing limited reopening protocols to varying degrees. Still, this depends on individual regions’ status. We still have millions who are staying at home, whether by government order or by voluntary action. Thus, the narrative is still positive for FB stock, especially in this new normal.
Cash Stocks: Alphabet (GOOG, GOOGL)
Out of all the cash cow stocks to buy, Google’s parent Alphabet stands alone. One of the chief reasons why is due to the company’s prevalence across multiple lucrative markets. From laptops to cloud computing to driverless-vehicle technology, GOOG disrupts any sector it wishes.
But the biggest reason I like Alphabet is that it dominates the internet. I realize that it’s a tired argument because everybody has mentioned it. That doesn’t mean, though, that the argument is any less valid.
For instance, we all know that Google is the most popular search engine, but the gap between first place and second-ranked Bing is a whopping 66%!
Moreover, Google is the unquestioned leader of mobile and tablet search engines with a 93% market share. In order to get anything done online, you essentially must go through Alphabet. And if your company doesn’t rank well on Google, you’re dead in the water.
Philip Morris International (PM)
On the surface, it appears big tobacco firms like Philip Morris face a double-whammy.
First, Americans are smoking cigarettes at a significantly reduced rate. Also, the under-18 crowd isn’t taking up the habit like prior generations had. Second, the vaping market has exploded in popularity thanks to its cleaner platform.
I don’t think it’s over for Philip Morris. For one thing, several markets, including the eastern Mediterranean and Africa, have witnessed a lift in smoking rates. That, of course, suits PM perfectly, which is the international arm of the iconic tobacco firm.
I concede that the coronavirus has put a damper on the technical performance of PM stock. Cynically, though, old vices are difficult to kick, especially in a time of quarantine.
Best of all, Philip Morris is a cash-rich organization. That provides substantial confidence in the company’s generous 6.38% dividend yield.
Lockheed Martin (LMT)
In any circumstance, I believe that defense-related cash cow stocks to buy represent solid investments. Though somewhat controversial depending on your perspective, companies like Lockheed Martin (NYSE:LMT) ultimately serve an important purpose: they keep honest (and in some cases dishonest) people honest.
Essentially, LMT stock is a less dire form of mutually assured destruction. Our adversaries are always on the prowl, looking to exploit our weaknesses. Thus, it’s imperative for our country to keep one step ahead. Lockheed Martin is a pivotal component in this perpetual cat-and-mouse game.
Furthermore, defense pays. Lockheed consistently generates strong free cash flow. Additionally, its latest read of return on asset of 14.2% is very favorable considering the circumstances.
Moving into our new normal, I expect LMT stock to trek steadily higher. Unfortunately, the disruption to our global economy will likely invite bad actors to try to advantage the situation. This is why we need defense contractors like Lockheed to discourage and if necessary, penalize belligerents.
Microsoft (MSFT)
Although a commonly cited name among cash cow stocks to buy, Microsoft continues to justify this title. Indeed, with the shelter-in-place orders that left millions of Americans forcibly quarantined for months, I believe the case for MSFT stock has only gotten stronger.
Obviously, Microsoft has focused heavily on the cloud computing business to much success. With pivotal cloud contract wins, the software giant has given Amazon (NASDAQ:AMZN) a run for its money. Additionally, as companies were suddenly forced into seeking cloud options, many have turned to Microsoft for its brand reputation.
What I especially like about MSFT stock is that the underlying Software as a Service model has also become more relevant. With telecommuting now the norm, there has never been a better time for Microsoft to organically market its suite of business programs.
I expect most of their conversion opportunities to remain with the brand post-coronavirus, making MSFT one of the most reliable stocks to buy.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.