Cash-cow stocks represent a distinctive category in the stock market that retail investors tend to underappreciate. But what are cash-cow stocks?
As the name suggests, cash-cow stocks generate substantial, predictable and recurring free cash flow per share. This metric is generally more telling than earnings per share because it provides a clearer picture of the actual cash available for quick deployment, omitting non-cash factors such as depreciation. Free cash flow’s consistency and reliability help investors forecast profits more accurately, creating improved pricing accuracy and long-term modeling.
Current interest rates and sky-high mega-cap valuations make cash flow more important than ever and cash-cow stocks more appealing as a result. That’s why cash-cow ETFs like the Pacer US Cash Cows 100 ETF (BATS:COWZ) have enjoyed record inflows in recent months.
If you want to create a custom basket of cash-cow stocks, though, starting with these seven companies creates a well-rounded, financially robust cash-cow portfolio of your own.
Occidental Petroleum (OXY)
The king of cash-cow stocks, Warren Buffett, loves Occidental Petroleum (NYSE:OXY) — and for good reason. Offering a 3% total yield and $4.9 billion in free cash flow over the past 12 months, few cash-cow stocks blend growth and income as effectively as Occidental Petroleum.
Over recent years, particularly in 2023, Buffett’s Occidental Petroleum holdings exploded in size. He now holds 27% of the oil and gas giant, valued at over $14.5 billion. He also possesses warrants that could boost his ownership to 33%. While Occidental is actively engaged in sustainability and net-zero initiatives, it also stands to gain from the rising crude oil prices currently observed in the market.
Recently, Occidental’s stock price has oscillated between $55 and $65, though it briefly touched $70 per share in April before settling back toward its usual trading range. But, thanks to both its intrinsic strengths and rising crude prices, the company’s shares may be ready to mark new highs. Now may be the best time to follow Buffett and buy this cash-cow stock with growth prospects situated within a well-established sector.
Zoom Video Communications (ZM)
Remote work isn’t going anywhere, and surprising cash-cow stock Zoom Video Communications (NASDAQ:ZM) is perfectly poised to capitalize on this trend. Offering $4.33 in free cash flow per share and plenty of continued growth prospects, Zoom’s expanding toolkit may represent a new momentum surge for the cash-cow stock.
Zoom has been integrating generative AI to enhance user experiences, unveiling a host of features last year. These include an AI assistant that integrates across Zoom’s platforms, encompassing meetings, chats, phone, email and whiteboard functionalities. More interesting, Zoom’s CEO is also moving toward creating “digital twins” with AI to improve personal productivity and further entrench the cash-cow stock as the main player in remote work tech.
To that end, Zoom is broadening its services to become a comprehensive solution for remote workers. Initially focused solely on video conferencing, Zoom is now developing a more integrated ecosystem. This evolution simplifies the user experience by eliminating the need for multiple applications, which reduces friction for remote workers and employers alike. Additionally, this approach enhances customer retention, as both large corporations and small businesses increasingly rely on Zoom as their primary provider for remote communication solutions.
Chipotle (CMG)
Chipotle Mexican Grill (NYSE:CMG) exemplifies a top cash-cow stock, as evidenced by its staggeringly high share price and imminent 50-for-1 stock split. This valuation is underpinned by the company’s robust free cash flow per share, which has averaged $13.91 across the past five quarters. Better yet, the company bounced back from a small dip of $3.41 free cash flow per share in 2023’s fourth quarter to hit a whopping $15.91 per share to start 2024.
With over 90% of its shares held by institutional investors, Chipotle is a favored stock among big financial entities. One notable investor, Bill Ackman, holds a 3% stake, benefiting significantly from Chipotle’s aggressive share buyback programs. Over the past five years, these buybacks have been a consistent feature, except during a brief hiatus during the pandemic. The company recently announced plans to continue this trend with an additional $200 million repurchase round, signaling ongoing confidence in its financial strategy and future growth prospects.
Restaurants tend to be a risky prospect (just ask Red Lobster), but Chipotle’s cash-cow status and institutional ownership both affirm its long-term potential.
Hanesbrands (HBI)
Hanesbrands (NYSE:HBI), a leading innerwear clothing seller, dominates 60% of the market across several countries. Despite this, the stock trades shockingly low, slightly above $5, equating to a mere 0.34x price-to-sales ratio even as the stock posted $503 million in free cash flow over the past 12 months.
The company has faced significant challenges, including supply chain issues and faltering consumer confidence, prompting management to streamline operations strategically. Recently, Hanes initiated steps to divest its Champion clothing line, focusing more on its core innerwear products. The deal is worth $1.2 billion but may climb to $1.5 billion if performance criteria are met, further increasing the cash-cow stock’s treasure chest.
Last year, Barington Capital Group, an activist investment firm, publicly urged Hanes to implement cost reductions, reduce inventory and improve margins. The proposed sale of Champion may be a direct response to Barington’s demands, signaling the beginning of a recovery phase for this undervalued cash-cow stock.
Booking Holdings (BKNG)
Booking Holdings (NASDAQ:BKNG), recognized for its array of travel services, including Priceline and Kayak, stands out as another cash-cow stock with a high share price exceeding $3,800. Despite a recent dip, Booking’s free cash flow per share is a massive $191.60 over the past 12 months. Institutional ownership is substantial, with more than 92% of the company held by institutions, contributing significantly to the firm’s 8.25% total yield, of which only 0.46% comes from dividends.
Analysts are optimistic about Booking Holdings’ future growth as the global travel industry rebounds from pandemic-induced lows. This optimism is supported by the company’s latest earnings report, which showed a 10% year-over-year increase in quarterly gross travel bookings and a 17% surge in sales. Moreover, annual income jumped by 192%, indicating that management is effectively navigating higher interest rates and tightening cost controls to enhance profit margins — both buoyed by an improving travel market that will likely explode as the summer progresses.
Photronics (PLAB)
Photronics (NASDAQ:PLAB) operates at the cutting edge of technology, specializing in the development of semiconductor photomasks — a critical component in semiconductor manufacturing. This focus positions Photronics at a pivotal junction between today’s essential tech and tomorrow’s limitless possibilities. Better yet, the small-cap tech stock is also a cash cow, generating $173.5 million in free cash flow over the past year.
Photomask technology, while complex, has a dual impact on technological progress. It ensures the precision and accuracy vital for advancing sectors like artificial intelligence and quantum computing, where increasingly intricate circuit designs demand flawless execution. Furthermore, Photomasks play a crucial role in miniaturizing transistors and other components, thereby driving advancements in line with Moore’s Law.
Trading at a modest 12.5x earnings, Photronics offers an attractive entry point for investors. This valuation is considered low for a tech stock, especially one that enables key technological advancements. With its stable and solid free cash flow, as well as its critical role in the semiconductor industry, Photronics represents a promising opportunity for growth as global dependency on semiconductor technologies continues to expand.
AutoZone (AZO)
AutoZone (NYSE:AZO) enjoys a strong following among auto enthusiasts and has captured the attention of institutional investors, with a remarkable 93% ownership rate and a share price hovering a bit below $3,000. As a prime example of a cash-cow stock, AutoZone has demonstrated stable financial performance, boasting an average free cash flow per share of $112.30 over the last 12 months.
The company recently reported strong third-quarter results, though somewhat muted compared to its record-setting second quarter. Still, AutoZone’s financials exceeded previous figures and market expectations, with earnings per share surging to $36.69 — a 7.5% increase year-over-year. Both revenue and profit margins expanded despite facing challenging holiday sales comparisons for both Christmas and New Year’s.
Furthermore, AutoZone has expanded its retail footprint, adding 45 new stores, bringing its total to 7,236 locations. Although these new stores initially impacted cash flow, they are poised to contribute positively soon, enhancing AutoZone’s robust free cash flow per share as they integrate into the company’s efficient operational model.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.