Although it has decreased in recent months, the United States’ inflation rate is still rather high. Investors are confident that the inflation rate will continue to decline, but a probable recession and higher interest rates for a longer period of time might hurt the economy and equities.
Co-founder and co-chairman of Oaktree Capital Management Howard Marks claims that there has been a “sea shift” in the financial landscape in recent years. According to Marks, a number of variables, including as the reversal of globalization, competitive labor markets, rising salaries, and an expanding economy, could maintain inflation higher than what investors have become accustomed to in recent years. If so, the period of extremely low interest rates and stimulative policies could be coming to an end.
Although no one can anticipate what will happen next, it is more important than ever to make sure your portfolio includes some sturdy businesses that can weather possible economic volatility.
These businesses reward investors through dividends or share buybacks, generating steady revenue and robust cash flows that make their stocks less volatile and more reliable.
Waste Management (WM 1.18%), McDonald’s (MCD 0.68%), and Berkshire Hathaway (BRK.A 1.34%) (BRK.B 0.87%) are three tenacious corporations that can reinforce your portfolio right now.
1. Waste Management, which operates over 259 landfills in the United States and Canada, is an essential component of the North American infrastructure.
Although you may be familiar with Waste Management’s residential garbage pickup service, that segment accounts for only 15% of the company’s revenue. To complete the company, it also offers commercial and industrial waste collection, transportation, recycling, and landfill storage.
It acquired 88 businesses during the previous five years, making it the biggest garbage and recycling firm in the United States with a 24% market share.
Waste Management’s 2020 revenue decreased by just 1.5% despite the downturn in business activity, but diluted profits per share (EPS) dropped by 10%. Since then, it has significantly recovered, with yearly sales and diluted EPS growth rates of 13.8% and 23.7%, respectively, over the subsequent two years.
Its free cash flow for the year, or the money left over after paying for operations and capital investments, was close to $2 billion. With this money, the business can reduce its debt or provide investors dividends and stock buybacks. The corporation spent $1.5 billion on stock repurchases and another $1 billion on dividend payments last year, providing a yield of 1.72% for investors.
Trash Management is an essential component of North American waste disposal, and its robust company can function no matter what the state of the economy is.
2. McDonald’s possesses a fast-food brand that is well-known across the world, and in the past year, price increases have helped to grow its customer base as people look for less expensive options. Its comparable-store sales climbed globally by 12% in the fourth quarter, with double-digit growth both domestically and abroad.
Even during recessions and inflation, McDonald’s business remained stable. The fast food chain’s diluted EPS doubled from $1.98 to $4.11 between 2007 and 2009. Its stock gained 54% over this time, outpacing the S&P 500’s 16% decline.
Strong free cash flow is produced by McDonald’s resilient company, which also gave investors $3.9 billion in share repurchases and $4.2 billion in dividends last year to give it a return of 2.15%. Its operations generate robust cash flows that continuously reward investors and can help stabilize your portfolio in the event of an economic downturn or persistently rising inflation in the coming years.
3. The holding firm of Warren Buffett holds shares in a number of well-known companies, including Apple, Bank of America, and Chevron, that are publicly listed.
GEICO, General Re, Berkshire Hathaway Reinsurance, National Indemnity, and Allegheny, its most recent $11.6 billion acquisition, are just a few of the insurers that Berkshire owns.
According to Buffett, insurance makes up “a very big portion of Berkshire’s assets,” and the sales of insurance products “will always expand along with economic growth and inflation.”
They sit on a large sum of money that they may hold and invest in but do not actually possess since they do not pay out cash until clients file claims. The term for this cash is “float,” and Buffett attributes much of the company’s success to its float.
Since Berkshire initially acquired National Indemnity in 1967 through the end of the previous year, its market value has increased by 18% annually, from $19 million to $147 billion. This float is “sticky” because its cash flows are often consistent, enabling Berkshire to adopt a long-term investing strategy.
A significant contributor to Berkshire Hathaway’s lengthy history of success is its insurance division. As they did during the entire year of 2022, the constant business gives Buffett and his team continuous cash flows that they may invest in equities. Regardless of the state of the economy, Berkshire is a robust company due to its continuous cash flow.