As your investment goals slowly evolve from growth to withdrawal (usually not the most difficult part of implementing a financial plan), there’s nothing wrong with introducing a few cash cows into your portfolio. A cash cow is a company that has a mature product or service and is focused on maximizing shareholder value of those mature offerings, instead of pursuing growth for growth’s sake.
One problem with solely buying cash cows is that you still need to preserve your purchasing power. So that led me to look for cash cow companies with a bit of spark left in them. And, by spark, I meant consistent growth of the most important fundamental metrics at a higher rate than inflation. Maybe instead of cash cows, we’ll call these cash calves.
These cash calves have historical 10-year growth rates of revenue and earnings of 10% or higher. I also required dividend and cash flow growth to be 10% or higher, too. Looking ahead, I wanted to see projected EPS growth of at least 7%, thinking that would leave a margin of error if we want to simply preserve purchasing power. I wasn’t as concerned with the dividend yield as I was that there be at least a dividend of some sort, thinking that sooner or later all that cash flow will be deployed for investors through dividends or cash buybacks, which might be more tax efficient anyway. I used the existence of a dividend as evidence the companies aren’t solely focused on growth.
Since these are stocks that are for post-growth investing, I wanted to minimize surprises. One step I could take was to require the stocks have a beta of one or less. A stock with a beta of less than one has less volatility than the overall market. A beta of one has the same volatility as the market, and a beta of greater than one is more volatile than average. I also rejected American Depository Receipts and companies with less than a $10 billion market capitalization.
Several of the stocks are hardly new to BetterInvesting clubs. Visa, American Tower and UnitedHealth come quickly to mind. There are Canadian stocks and two stocks with different share classes. Sirius XM, to me, is a blast from the past. I had written them off as essentially dead with streaming media, but, at a recent price of $7.24, the stock has come a long way from trading at less than a dollar in the early 2000s.
By Sam Levine, CFA, CMT | Acting Executive Editor
Stock screen generated from www.MyStockProspector.com on February 23, 2020.
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