Cash is king, especially in uncertain times like these.
With the global economy showing some serious volatility, holding stocks with secure balance sheets and reliable cash flows is one way to beat the volatility and sleep easy at night. Even in a healthy economy, a steady profit stream is always an advantage -- it's a sign of a sustainable competitive advantage, and means it's a stock you can buy and hold for the long haul.
1. Facebook: A social media monopoly
It's hard to think of a bigger cash cow than Facebook. The social media giant counts nearly 3 billion people around the world as monthly users of one of its four core apps, including Instagram, Messenger, and WhatsApp, and that vast user base underpins the competitive advantage that Facebook enjoys, which have given the company some of the biggest operating margins you'll ever see as an investor.
The company finished 2019 with a 34% operating margin, meaning it keeps more than one-third of its pre-tax revenue. Excluding $5 billion in FTC fines last year, Facebook would have had an operating margin of 42%.
Not surprisingly, that fat operating margin, which comes from the company's immense value to advertisers, produces boatloads of cash. Last year, Facebook generated $21.1 billion in free cash flow, and the company had $60.3 billion in cash, cash equivalents, and marketable securities on its balance at the end of the first quarter.
As the company grows its user base, further monetizes its platforms -- especially Instagram -- and introduces new products like Facebook Shops, its cash-generating power will only increase, as will the company's market value.
2. Berkshire Hathaway: A unique conglomerate
There's no business in the world like Berkshire Hathaway. Warren Buffett's conglomerate has combined a disparate group of businesses representing areas like consumer goods, insurance, railroads, energy, and manufacturing under one umbrella and tied that to a massive investment fund that owns billions worth of stock in companies like Coca-Cola and Apple.
Buffett's reputation precedes him, and Berkshire has been one of the best-performing stocks and most powerful wealth generators in the last 50 years. Today, Berkshire Hathaway's market cap totals roughly $445 billion.
Buffett's preference for value investing and his bias toward stocks and companies with sustainable competitive advantages have made Berkshire Hathaway an unquestionable cash cow. Last year, the company generated $22.7 billion in free cash flow, which doesn't count any gains from investments, and finished the year with $125 billion in cash, equivalents, and short-term investments.
That gives Buffett a tremendous war chest should he find a new investment deal that looks appealing, which (given the upheaval going on in the global economy) seems likely.
3. Altria: A dirt-cheap profit machine
Like Berkshire Hathaway, Altria has also been one of the best-performing stocks over the last 50 years thanks, in large part, to its generous dividend. The Marlboro cigarette-maker has hiked its quarterly payout 53 times in the last 50 years, and today offers a whopping 8.7% dividend yield.
There's no doubt that Altria is a cash cow, either. Last year, the tobacco giant had an operating margin of 41.1% on operating income of $10.3 billion, and its free cash flow totaled $7.6 billion. Altria's impressive profit margins are supported by its ownership of 50% of the U.S. cigarette market, with Marlboro capturing 43% of the total. That's proof of a brand with a significant competitive advantage.
Despite its position as a recession-proof company and evidence that cigarette sales tend to increase during stressful times, Altria stock has underperformed the market during the pandemic -- the stock is down 22% year-to-date. Investors are wary of the company's future since it was forced to take multi-billion-dollar writedowns on Juul Labs, the e-cigarette company it invested $12.8 billion in, and marijuana-grower Cronos Group, in which it took a 45% stake for $1.8 billion.
Even with its long-term future uncertain, the decline in smoking has been slow, and that will enable Altria and its investors to enjoy strong profits for the foreseeable future. With a price-to-earnings ratio under 9 and a dividend yield close to 9%, Altria looks like a bargain today.