By David Goodboy
Cash is the lifeblood of every company. It is the core ingredient that enables corporations to enrich their shareholders and thrive as a business. Without cash flow, a business will wither on the vine even faster than a plant without water.
However, many fail to consider a company’s cash position when evaluating investments. Cash-rich stocks not only often boast higher dividends but can allow a company to support its own stock price through buybacks. Cash can also build a strong moat that provides the strength needed to make it through economic downturns.
Finding a company with a cash-heavy balance sheet in a defensive sector is a powerful way to protect your wealth from market downturns.
My favorite defensive sector is consumer staples. Consumers will always spend on necessities like food and beverages regardless of economic conditions. In fact, the sector is up over 10% this year and is poised to continue its solid performance, even as the “Trump trade” starts to unwind.
That’s why I expect these stocks to be productive investments well into the future:
Altria Group Inc
The Virginia-based tobacco giant Altria Group Inc (NYSE:MO) is trading higher by over 8% this year. Over the previous 52 weeks, the company generated over $3 billion in free cash flow.
The company is expected to earn nearly $3.30 per share in 2017, a nearly 10% increase over the previous year. At the same time, the cash increase is forecasted to ramp up the dividend payout to $2.58 per share.
Investors need to note that despite substantial free cash flow and Altria’s position as one of the most attractive long-term dividend payers on the market, there is some concern that the cash flow is not sufficient to absorb steadily increasing dividends. This situation may require the company to add to its debt levels over the next few years.
The Coca-Cola Co
The Coca-Cola Co (NYSE:KO) has suffered lackluster performance recently, with losing 1.5% over the last 52 weeks despite a nearly 8% gain in 2017.
However, the company boasts one of the highest dividend yields in the S&P 500 consumer staples sector at 3.3%. Coke is expected to ramp up its free cash flow in 2017 to just over $7 billion, representing a $500 million increase from 2016. A dividend increase is expected along with the free cash flow improvement.
It’s important to note that the company’s revenue fell in its first quarter and profits have suffered from outsized expenses tied to bottling plant sales.
Playing second fiddle to Coke, PepsiCo, Inc. (NYSE:PEP) produces a dividend yield of nearly 3% with a 61% payout ratio. However, it does have one distinct advantage: The company’s payout ratio is the lowest of the five companies in this article.
The low payout ratio combined with high cash flow suggests that Pepsi is in a good position to keep increasing dividends and attracting investors. Earnings are projected to increase 6% in 2017 to over $5.10 per share, and the dividend is expected to increase to $3.16 per share over the same timeframe.
Pepsi is also riding on the success of new products. 8%-plus of revenue can be attributed to new items. Life Water alone accounted for $70 million in retail sales since its release earlier in the year.
The latest earnings show $1.44 per share on revenue of $15.7 billion. The performance beat analysts’ expectations of $1.40 on revenues of $15.6 billion.
Action To Take
Take a close look at free cash flow before making investment decisions. Consider adding one or more of the above-listed consumer companies, flush with cash, to beef up the defensive portion of your portfolio.