When it comes to investing in stocks, knowing how a business makes its money -- and how it plans to continue making money -- is one of the first steps to take in your research. For some businesses, especially in hard-to-understand technical industries, figuring things out can be a tall order. Nevertheless, not fully understanding the moneymaking operation of a business can be a recipe for disaster. As a favorite Warren Buffett quote goes, "Risk comes from not knowing what you're doing."
Never fear, though. There are plenty of companies out there that are both easy to understand and are making shareholders lots of money in the process. Here are two that these Motley Fool contributors think are worth a look: Mastercard (NYSE:MA) and Procter & Gamble (NYSE:PG).
The financial industry's tollbooth
Nicholas Rossolillo (Mastercard): Banking can be a difficult business to understand. With lots of moving parts, transparency can be hard to come by. The payment processing segment of the financial industry, however, is a different story. Every transaction that takes place on a system carries a fee, so the more transactions processed, the better. Pretty simple, right?
That's the case for the world's second largest credit card company, Mastercard. While the transaction processing company offers some other services, such as security to its partners -- banks, retailers, and others who issue plastic under the Mastercard name -- the basic operation works like a tollbooth. The more fee-collecting transactions being processed using the Mastercard system, the more money the company makes.
Mastercard operates in over 210 countries, and while credit cards are commonplace in many developed countries, cashless payments are still a growing endeavor in many parts of the globe. Case in point: Mastercard's dollar volume of transactions grew 18% in 2018, which equated to a 20% revenue gain. Because the profit margin on that tollbooth-style business is so high -- 48.7% after all operating expenses, to be exact -- the revenue gain equated to a 42% increase in earnings per share after adjusting for one-time items. That's a powerfully simple business model that should continue to reward investors for years to come.
A consumer-goods company you can't miss
Daniel Miller (Procter & Gamble): The world of investing can seem incredibly complicated, but there are also stocks and brands anybody can understand -- and it's always a good idea to invest in what you know and understand. One stock anyone can understand is Procter & Gamble, which owns a long list of incredibly popular and successful consumer-goods brands.
In fact, you've probably bought a consumer-goods product from the company recently, perhaps without even realizing it. Procter & Gamble owns 21 brands that generate over $1 billion in annual global sales, including Tide, Charmin, Pantene, and Pampers, among many others. In all, P&G owns 65 incredibly popular brands, and because it has such widespread channel sales, it's a vital partner for retailers counting on consistent distribution and innovative brands that drive growth.
Because Procter & Gamble is a valued partner for retailers, the company has become a cash-producing machine over the years. In fact, over the past 10 years, the company returned $120 billion cash to shareholders, partly through its dividend, which has increased annually for 62 consecutive years. Only 13 public companies have generated more cumulative profit and cash than P&G over that same 10-year time frame.
With all that said, it's been a transitional couple of years for P&G, as management has cut roughly 100 brands from its mix, in hopes that focusing on 65 core brands will help drive innovation and organic sales. In addition to its rising stock price, there are signs that the transition is working: Through the first half of 2019, eight of P&G's 10 categories are growing sales over the prior year.
Thanks to its necessity-based products that consumers purchase regularly, P&G is a stock anybody can understand. It's also a stock rising after a transitional period, and it offers investors a measure of safety with its 2.8% dividend yield that consistently offers investors income.