I wanted to find a few cash cow stocks to buy that are both cheap, and have attractive upside potential. In turn, the idea is that the companies are expected to be both highly cash-flow positive and also inexpensive.
Moreover, based on three measures of valuation, the upside potential for these stocks is very attractive. Therefore, I wanted to make sure that the potential return is at least 20% higher than the buy price.
Moreover, the three measures of value I used are the historical dividend yield, the historical price-earnings (P/E) and a peer comparable valuation.
The result is that I found five stocks with an average 17 times forward price-earnings ratio, a 2.6.% dividend yield and a 57% expected upside.
The five stocks are:
- 3M Company (NYSE:MMM)
- Oracle Corp (NYSE:ORCL)
- Cognizant Technology Solutions (NASDAQ:CTSH)
- Hanesbrands (NYSE:HBI)
- Visa (NYSE:V)
So, let’s dive in and look at these five stocks to buy.
Cash Cow Stocks To Buy: 3M Company (MMM)
Market Value: $87.1 Billion
Dividend Yield: 3.8%
Stock Target Upside: 39%
3M is a manufacturing company active in four major areas: Safety and Industrial, Transportation and Electronics, Health Care and Consumer.
I have written several articles about 3M Company and its very nice dividend yield. In fact, in one article, I argue that the company’s secure dividend drives its value. And right now, MMM stock has an attractive 3.8% dividend yield that is well-covered by the company’s cash flow.
Additionally, in that piece, I discussed how 3M produced $881 million in free cash flow (FCF) last quarter (ending March 31) . That said, this was more than enough to cover the $847 million dividend cost during the quarter. Also, I pointed out that 3M made plenty of cash for the year ending March 31.
Moreover, for fiscal year 2020, earnings per share (EPS) are expected to be $8.12. However, the dividend is expected to be just $5.88 per share. Therefore, earnings and cash flow should more than cover the dividend despite the current recession.
So, based on my assessment of 3M’s value, MMM stock has an upside of 39% from the present price as of July 10 of $152.85. This is based on an average of three values. That said, this first target price is $209.25 based on its historical dividend yield of 2.81%.
The second target price is $203.87, based on its historical P/E ratio of 22.8 vs. its present ratio of about 17 times. The third target is $224.32 based on its peer comp P/E ratio of 25.1 times. Therefore, the average price target is $212.48 — which is 39% higher than the July 10 price of $152.85.
So, for these reasons, MMM stock is one of the top cash cow stocks to buy.
Oracle Corp (ORCL)
Market Value: $175.2 Billion
Dividend Yield: 1.7%
Stock Target Upside: 70%
Oracle offers a suite of cloud-based enterprise information technology and software applications to corporations. Overall, the company is extremely profitable and can well afford its dividend. Also on that note, MMM stock currently boasts a dividend yield of 1.7%.
For example, during FY2020, Oracle made non-GAAP earnings of $3.85. That said, for FY2021, analysts expect earnings to rise more than 5% to $4.05 per share.
This puts the stock on a cheap P/E ratio of just 13 times. However, its historical ratio has averaged 22.5 times over the past 5 years.
Moreover, the average P/E of its peers is higher at 31.9 times. Therefore, my estimate of the value for ORCL stock is $97.70 per share — which is 70% higher than the July 10 price of $57.39.
So, collectively, Oracle is a cash cow producer that is both cheap and has a very attractive upside.
Cognizant Technology Solutions (CTSH)
Market Value: $30.2 Billion
Dividend Yield: 1.6%
Stock Target Upside: 60%
Cognizant Technology Solutions is a software and consulting company operating in four segments, including financial, healthcare, products and resources. And in those areas, Cognizant is extremely profitable.
For example, Cognizant made $1.77 billion in the last 12 months in the year ending March on $16.8 billion in revenue. And during FY2020, the company is expected to have EPS of $3.34 per share.
Moreover, CTSH stock is cheap. It trades for just 14.5 times estimated 2021 earnings of $3.84. Its dividend yield is attractive as well at 1.6%.
With all that in mind, my target price for the stock is 60% higher than today’s price of $55.78. For example, its historical past four-year yield is 0.79%. That implies its dividend related target price is $111.39 — nearly double today’s price.
Its historical P/E target value is based on an average of 20.6 times, putting the stock’s value at $79.10. This is 42% higher. Lastly, its comp-based P/E ratio is 24.5 times, putting the stock’s value at $94.21. That is 69% higher. Therefore, the average price target is $94.90, an upside of 70% from today.
Overall, CTSH stock is another one of the best cash cow stocks to buy for these reasons.
Market Value: $4.3 Billion
Dividend Yield: 5.2%
Stock Target Upside: 86%
Hanesbrands sells clothing for men and women in three segments: innerwear, activewear and international. It is known for its underwear, socks and activewear.
On Wall Street, analysts expect the company to have EPS of 67 cents per share this year. This more than covers the dividend which costs 60 cents per share. This gives the HBI stock an attractive dividend yield of 5.2%. Moreover, the stock is cheap at just 8.7 times earnings that analysts estimate for 2021.
Additionally, the company produces a large amount of free cash flow. Its cash flow from operations was $914.5 million over the past year. However, since capital expenditure was only $101.6 million, its free cash flow was $812.9 million. That is very high compared to its $4.3 billion market value. Therefore, its FCF yield is just under 20%.
That said, my target price for HBI stock is about 86% higher than today’s price. This is based first on its historical dividend yield of 3.37%, much lower than the present 5.2% rate. Based on that yield the stock should be at $17.80, 56% higher than its July 10 price of $11.43.
In addition, Hanesbrands historical P/E has been 14 times over the past five years. Therefore, HBI stock should be trading at $18.33 per share, nearly 50% higher than today. Lastly, its comp-based P/E ratio is 21 times. The relevant target price is $27.54, which is 141% higher.
Therefore, the average target price is $21.23, which is 86% higher than today. It may take some time for Hanesbrands stock to get there, but patient investors can expect that earnings and the stock will recover.
Market Value: $424.4 Billion
Dividend Yield: 0.6%
Stock Target Upside: 21%
Visa is a true cash cow machine. For example, in the last 12 months,, the company has produced cash flow from operations of $12.8 billion. Since capital expenditures were only $850 million, it produced a massive FCF of $11.9 billion.
Moreover, its EPS of $5.04 per share expected for FY2020 is more than cover the dividend of $1.20 per share. That said, FY2021 earnings should rise to $5.90 in 2021. People are still using their VISA card — and once the recession ends, analysts expect that card usage will increase.
Additionally, my price target is $232.85 per share, or 21% higher than the July 10 price of $192.55. This represents an average of its target dividend yield, historical P/E and comp-based P/E ratio targets.
Summary: Cash Cow Stocks To Buy
These five stocks, as a group, are both cheap and have attractive upside potential. Moreover, investors receive a nice dividend yield of 2.6% on average, while they wait for the stocks to rise. For example, the upside potential of this group on average is 57%.
You can see a summary of these numbers in the table above by clicking to enlarge the image.
Therefore, patient value investors know that these companies have plenty of cash flow and earnings. And yet, the stock price valuations are not expensive. In turn, that is a winning formula for most investors.
Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers receive a two-week free trial. As of this writing, Mark does not hold a position in any of the aforementioned securities.