In times of rising economic uncertainty, cash is king. Therefore, today’s article focuses on cash-cow stocks and exchange-traded funds (ETFs) that invest in such shares.
Businesses require cash to meet their obligations in good times and bad. Thus, free cash flow (FCF) offers a good gauge to measure a company’s ability to navigate headwinds, such as geopolitical tensions, trade wars and recessions.
Analysts pay significant attention to companies with a high FCF, or cash-cow stocks. Those firms generate steady cash flows to grow their operations, which in turn may translate into reliable returns for shareholders. Such companies can increase their dividend payments or repurchase their own shares as well. In addition, they can decide to pay off debt.
Research by FTSE Russell highlights, “The top 100 highest yielding free cash flow companies in the US large-cap Russell 1000 Index outperformed the broad index by nearly 13% in periods of rising rates and by nearly 3% in periods of falling rates between Dec. 31, 1991, and Sept. 28, 2018.”
Therefore, potential investors may want to pay close attention to companies that generate significant levels of cash. With that in mind, here are five of the best cash-cow stocks to buy and similar ETFs that could help grow your investment portfolio in the second half of 2022.
|BHP||BHP Group Limited||$65.28|
|TTAI||FCF International Quality ETF||$29.46|
|COWZ||Pacer US Cash Cows 100 ETF||$49.17|
BHP Group Limited (BHP)
52-week range: $46.64 – $71.56
We start our discussion with BHP (NYSE:BHP), the world’s largest mining company. It mines copper, iron ore, nickel, metallurgical coal and potash. Put another way, the group supplies all the essential core materials to the modern economy, including copper, which is used heavily in electric vehicles (EVs).
For the six months to Dec. 31, 2021, BHP on Feb. 15 announced robust half-year 2022 results. Operational profit was $14.8 billion, up 50%. FCF was $8.5 billion for the period.
In May, BHP inaugurated a new copper concentrator in Chile. As a result, the company’s global copper portfolio is stronger.
Recently, BHP completed its merger with Woodside Energy Group Limited, Australia’s largest dedicated oil and gas company. This transaction makes BHP as one of the global top 10 independent energy companies by production.
BHP stock has returned 11% year-to-date (YTD) but has lost 10% over the last 12 months. Dividend yield is a handsome 10.4%.
Shares are changing hands at 8.1 times earnings and 2.5 times sales at current prices. Meanwhile, the 12-month price forecast for BLDP stands at $63.79.
FCF International Quality ETF
52-week range: $28.10 – $37.71
Dividend yield: 1.03%
Expense ratio: 0.61% per year
Next up is an ETF, namely the FCF International Quality ETF (BATS:TTAI). This actively managed fund gives exposure to a global portfolio of stocks with strong free cash flow characteristics. Therefore, it may appeal to investors looking outside the U.S. amidst the volatility on Wall Street.
TTAI, which started trading in 2017, currently has 137 holdings. In terms of regional breakdown, we see the U.K. (12.5%), Switzerland (9.7%), Japan (8.7%), Canada (8.5%) and Australia (7.7%).
The 10 biggest holdings comprise 18% of $58 million in net assets. Among them are the Denmark-based healthcare company Novo Nordisk (NYSE:NVO); Royal Bank of Canada (NYSE:RY); Dutch semiconductor name ASML (NASDAQ:ASML); Swiss pharma giant Roche (OTCMKTS:RHHBY); and, Canada-based Toronto-Dominion Bank (NYSE:TD).
Industrials have the largest portion of the fund’s sectoral exposure (21.5%). Next are financials (14.1%), information technology (13.4%), consumer discretionary (11.3%) and materials (9.1%).
TTAI hit a 52-week low on May 12. It is down more than 17% year-to-date (YTD) and 16% over the past 12 months. Interested investors could find better value below $30.
KLA Corporation (KLAC)
52-week range: $287.44 – $457.12
KLA (NASDAQ:KLAC) develops equipment and services for the entire electronics industry. It is a well-known manufacturer of process control solutions for the chip sector.
On April. 28, KLAC released Q3 FY22 results. Revenue reached $2.29 billion. Adjusted EPS surged 33% to $5.13 from $3.85 a year ago. FCF for the quarter was $718.6 million.
Recently, KLAC announced the launch of its Frontline Cloud Services. This software solution accelerates design-for-manufacturability (DFM) analysis and time-to-market (TTM) for complex printed circuit boards (PCBs). For users, moving DFM analysis to the cloud means the amount of time needed to run transactions can be reduced by up to 90%.
KLAC stock has declined 17% YTD yet has risen almost 14% in the past year. Dividend yield is 1.16%. Shares are trading at 13.9x forward earnings and 6x sales at current prices. In the meantime, the 12-month median price forecast for KLA stock is at $425.
Pacer US Cash Cows 100 ETF
52-week range: $41.43 – $51.60
Dividend yield: 1.39%
Expense ratio: 0.49% per year
COWZ, which was first listed in December 2016, seeks long-term capital appreciation by investing in 100 selected companies with high free cash flow yields.
With regards to sectoral allocations, we see healthcare (22.9%), energy (16.5%), consumer discretionary (15%), materials (14.9%), information technology (9.6%), and communication services (8.8%).
The top 10 holdings account for almost a quarter of $6.3 billion in net assets. Valero Energy (NYSE:VLO), Occidental Petroleum (NYSE:OXY), Phillips 66 (NYSE:PSX), McKesson (NYSE:MCK), EOG Resources (NYSE:EOG), and Pfizer (NYSE:PFE) lead the names on the roster.
So far, in 2022, COWZ is up 8.5% and hit a record high on April 21. Despite the bearish market sentiment, the fund has returned close to 18% over the past 12 months. We believe COWZ needs further due diligence.
Phillips 66 (PSX)
52-week range: $63.19 – $104.84
Energy manufacturing and logistics group Phillips 66 specializes in refining, midstream, chemicals, as well as marketing and specialties (M&S). With a market-cap of about $52 billion, PSX is likely to see more growth in future quarters.
Phillips 66 reported Q1 results on April 29. Adjusted EPS came in at $1.32 per share. The energy play generated $1.1 billion of operating cash flow.
In May, Phillips made the final investment decision to convert its San Francisco refinery to the world’s largest renewable fuel facility. It should become commercially operational in 2024.
At the beginning of June, management signed a letter of intent with FreeWire Technologies in support of its first U.S. electric vehicle (EV) charging program. The two companies will explore opportunities to utilize FreeWire‘s battery-based technology in Phillips 66‘s fueling stations.
PSX stock has appreciated 38% YTD and 13% over the past 12 months. Dividend yield is 3.71% at the current 52-week high price.
Shares are trading at 10.2 times forward earnings and 0.33 times sales. Finally, the median 12-month forecast for PSX stock stands at $114.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.