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Warren Buffett is holding these stocks for the huge free cash flow — with inflation at a 31-year high, you should too

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·3-min read
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  • BRK-A
  • BRK-B
  • CVX
  • RUTCX
  • KO
  • MCO
Warren Buffett is holding these stocks for the huge free cash flow — with inflation at a 31-year high, you should too
Warren Buffett is holding these stocks for the huge free cash flow — with inflation at a 31-year high, you should too

Wall Street pays a ton of attention to company earnings.

But reported earnings are often manipulated through aggressive or even fraudulent accounting methods.

That’s why risk-averse investors need to focus on companies that generate gobs of free cash flow.

Cold, hard cash is real, and can be used by shareholder-friendly management teams to:

  • Pay inflation-fighting dividends.

  • Repurchase shares.

  • Grow the business organically.

Investing legend and Berkshire Hathaway CEO Warren Buffett is famous for his love of cash flow-producing businesses.

Let’s take a look at three stocks in Berkshire’s portfolio that boast double-digit free cash flow margins (free cash flow as a percentage of sales).

Chevron (CVX)

Chervon gas station canopy and sign.
Ken Wolter/Shutterstock

Leading off our list is oil and gas giant Chevron, which has generated $13.9 billion in free cash flow over the past 12 months and consistently posts free cash flow margins in the ballpark of 10%.

The shares have been hot in recent months on the strong rebound in energy prices, but with inflation continuing to heat up, there might be plenty of room left to run.

Management’s recent initiatives to cut costs and improve efficiency are starting to take hold and should be able to fuel shareholder-friendly actions for the foreseeable future.

Just last week, Chevron announced that it would boost its buyback program to as much as $5 billion a year, about 60% higher than previous guidance.

The stock still offers an attractive dividend yield of 4.7%, which investors can pounce on using some extra cash.

Moody’s (MCO)

Moody's logo on new office building
Andrius Zemaitis/Shutterstock

With whopping free cash flow margins above 30%, credit ratings leader Moody’s is next up on our list.

Moody’s shares held up incredibly well during the height of the pandemic and are up nearly 290% over the past five years, suggesting that it’s a recession-proof business worth betting on.

Specifically, the company’s well-entrenched leadership position in credit ratings, which leads to outsized cash flow and returns on capital, should continue to limit Moody’s long-term downside

Moody’s has generated about $2.4 billion in trailing twelve-month free cash flow. And over the first nine months of 2021, the company has returned $975 million to shareholders through share repurchases and dividends.

Moody’s has a dividend yield of 0.6%.

Coca-Cola (KO)

Various type of Coca Cola drinks. Coca Cola drinks are produced and manufactured by The Coca-Cola Company
MAHATHIR MOHD YASIN/Shutterstock

Rounding out our list is beverage giant Coca-Cola, which has produced $8.1 billion in trailing twelve-month free cash flow and habitually delivers free cash flow margins above 20%.

The stock has had plenty of ups and downs in recent months, but patient investors should look to take advantage of the short-term uncertainty. Coca-Cola’s long-term investment case continues to be backed by an unrivaled brand presence, massive scale efficiencies, and still-attractive geographic growth tailwinds.

And the company is back to operating at pre-pandemic levels.

In the most recent quarter, Coca-Cola posted revenue of $10 billion, up 16% from the year-ago period, driven largely by a 6% increase in unit case volume.

Coca-Cola shares offer a dividend yield of 3.1%.

Generate income outside of the shaky stock market

Luxury Yacht Aerial View
Dreamer Company/Shutterstock

Even if you don't like these specific stock picks, you should still look to implement Buffett's time-tested strategy of investing in real assets that produce cold, hard cash.

And you don't have to limit yourself to the stock market.

For instance, some popular investing services make it possible to lock in a passive income stream by investing in a wide variety of alternative assets — including fine art, commercial real estate, and even luxury vehicle finance.

You’ll gain diversified exposure to alternative asset classes that big-time investment moguls usually have access to, and you’ll receive regular payouts in the form of monthly or quarterly dividend distributions.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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