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3 Top Stocks That Are Cash Cows

By Demitri Kalogeropoulos – Aug 20, 2021 at 12:12PM

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For market-thumping returns, just follow the money.

There's a long list of ways in which a company's reported earnings can fail to reflect the true performance of the business. These include one-time write-offs, tax adjustments, and accounting charges, just to name a few. Management teams can sometimes make decisions that juice reported earnings (for example, through asset sales) at the expense of long-term profitability.

That's why many investors choose to put a premium on cash flow metrics, which can paint a more reliable picture of the business. With that goal in mind, let's look at three companies -- eBay (EBAY 0.09%), Netflix (NFLX 1.09%), and McDonald's (MCD) -- that are minting cash so far in 2021.

Person sitting on a couch with an open laptop while holding a credit card.

Image source: Getty Images.

eBay is awash in cash

The e-commerce niche has been a great place to have a leadership position during the pandemic. Buyers and sellers both flocked toward digital platforms in ways that only accelerated the long-term shift toward that selling channel.

But eBay stands out as a particularly strong cash producer. Free cash flow (FCF) this past quarter edged up to a whopping 34% of sales, far greater than what peers like Walmart and Amazon can manage. eBay's middleman selling approach helps on this score, with earnings boosted by fees it charges to sellers that use its platform.

That seller-fee level recently crossed into the double digits and could keep climbing as eBay adds value to its service through offerings like promoted listings and payments processing. Look for accelerating cash returns through late 2021 as a natural consequence of these successes.

Netflix is improving

Achieving positive cash flow can often take many years for a start-up, but the results can be dramatic for those companies that get it right. Netflix is a great example today. The streaming video giant's annual cash losses moved steadily toward $2 billion before recently rocketing up to gains of over $2 billion.

NFLX Cash from Operations (TTM) Chart

NFLX cash from operations (TTM) data by YCharts. TTM = trailing 12 months.

Yes, part of that spike came from a temporary pause in spending during the pandemic. But Netflix is targeting positive cash flow in 2021, with improving results likely for the foreseeable future. The roughly 15% FCF margin that the company briefly achieved last year is not just indicative of its long-term potential, but "just the start," according to CFO Spencer Neumann. The stock's performance might track closely with that rising cash rate in 2021 and beyond.

McDonald's has it all

It's good to be the leader in a massive global industry. But McDonald's pairs that attractive positioning with a uniquely strong operating model. The fast-food giant's franchise approach delivers stable (and rising) royalties, rents, and fees, which through the first half of 2021 helped generate $3.9 billion of operating cash compared to $11 billion of revenue.

That setup only works if you can keep several groups happy at the same time, namely, customers and franchisees. Mickey D's has proved its ability to do just that through a wide range of selling conditions and demand swings. The chain adjusted to a pivot toward healthier, less-processed food in recent years, and it is currently making a similarly large shift toward digital ordering and home delivery.

Through all those moves, cash flow has been a comforting hedge against the normal risks associated with the restaurant industry. And that steady resource stream should support further market-beating gains for shareholders from here.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Demitri Kalogeropoulos owns shares of Amazon, McDonalds, and Netflix. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool recommends eBay and recommends the following options: long January 2022 $1,920 calls on Amazon, short January 2022 $1,940 calls on Amazon, and short October 2021 $70 calls on eBay. The Motley Fool has a disclosure policy.

Stocks Mentioned

Netflix Stock Quote
$320.41 (1.09%) $3.46
McDonald's Stock Quote
$273.40 (%)
Walmart Stock Quote
$153.22 (-0.10%) $0.15
eBay Stock Quote
$45.20 (0.09%) $0.04 Stock Quote
$94.13 (-1.44%) $-1.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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