Some Modern-Day Widows and Orphans Stocks
Are there still such things as widows and orphans stocks? For those of you unfamiliar with the term, widows and orphans stock is old-school Wall Street slang for an equity that is so secure that a person with no other source of income or a limited source of income can safely invest in it.
Historically, very large corporations with monopolies or near monopolies, such as utilities or the old phone company AT&T (not the modern telecom, which is actually BellSouth with a new name), were given the label. More recently, retail giant Walmart (NYSE: WMT) and oil companies like Exxon-Mobil (NYSE: XOM) have carried the nickname.
The problem is that both of those companies have faltered in recent months. Walmart is faced with declining revenues and falling stock values for the first time in recent memory. Falling oil prices have also hammered Exxon-Mobil. Over at Seeking Alpha, Simply Safe Dividends noted that the giant oil company’s free cash flow is no longer sufficient to cover its dividend. That means Exxon-Mobil is no longer the money machine it once was.
What a Modern-Day Widows and Orphans Stock Would Look Like
Naturally, many people will ask the question, is there still such a thing as a widows and orphans stock? My answer to that question is yes, such equities still exist, although they may have different attributes than before. Here’s my definition of a modern-day widows and orphans stock. It would have four attributes:
- A lot of cash
- Steadily growing revenues
- A business that generates a lot of float; that is, extra cash it can use for any purpose it sees fit
- A realistic share price
Fortunately, there are more than a few companies out there that meet those attributes. A few of my favorites are listed below for those looking to add to their portfolios.
Modern-Day Widows and Orphans Stocks
- Alphabet (NASDAQ: GOOGL) – The company formerly known as Google (NASDAQ: GOOG) makes the list because of its impressive revenue growth. It went from $63.6 billion in September 2014 to $71.76 billion in September 2015. It had a great income, $16.48 billion for the third quarter of 2015, a free cash flow of $3.635 billion and float. Alphabet had $72.77 billion in cash and short-term investments—in other words, money in the bank. The bottom line: Google is a great company, and its share price ($728.17 a share on November 4, 2015) is justified. If any company becomes the Berkshire Hathaway of the 21st century, it will be Google. Like Berkshire, Google is a highly diversified holding company that limits its risks.
- Berkshire Hathaway (NYSE: BRK.B) – Okay, this is a little obvious, but a lot of us forget just how good Uncle Warren’s company is. Berkshire reported a TTM revenue of $188.81 billion in June 2014 that grew to $199.74 billion in June 2015. It also had a net income of $17.95 billion, a free cash flow of $4.591 billion and $66.59 billion in cash and short-term investments. Another reason why I like Berk Hath is that it is highly diversified; Buffett’s company operates in dozens of businesses, including media, logistics, insurance, finance and manufacturing, to name a few. If safety is what you seek, this is a good choice. It was a little pricey at $137.51 a share on November 4, but I still think the price is worth it.
- Apple Inc. (NASDAQ: AAPL) – The best way to describe this company is as a money machine. Its revenue growth has been incredible in recent years. In September 2014 Apple reported a TTM revenue figure of $182.79 billion that grew to $233.72 billion by September 2015. That’s right, folks, Apple’s revenue grew by $50.93 billion in a year. Apple also reported a net income of $53.39 billion, a free cash flow of $9.817 billion and cash and short-term investments of $41.6 billion on September 30, 2015. So if you like cash, you have to love Apple. It also pays a nice dividend yield of 1.61%, unlike Berkshire and Alphabet. Apple is also very underpriced; it was trading at $122.70 a share on November 4, 2015.
- Oracle Corporation (NASDAQ: ORCL) – Even though its revenue has shrank slightly over the past year, it reported a TTM revenue of $38.08 billion in August 2015, down slightly from $38.50 billion in 2015; this company makes the list because it has a lot of cash. Oracle reported a net income of $9.501 billion and a free cash flow of $5.41 billion for third quarter 2015. More importantly, Larry Ellison’s organization had $55.93 billion in cash and short-term investments on August 31, 2015. This company is a widows and orphans investment because of all that float. Another reason why I like Oracle is that it was eminently affordable; it had a price of $40.37 a share on November 4, 2015.
- Cisco Systems (NASDAQ: CSCO) – The systems maker makes the list because of steady revenue growth—its revenues went from $47.14 billion in July 2014 to $49.16 billion in July 2015—and a lot of cash. Cisco reported a net income of $8.98 billion, a free cash flow of $3.818 billion and cash and short-term investments of $60.42 billion in July 2015. It also had a nice dividend yield of 2.87%. The best thing about Cisco, though, was its share price of $28.54 on November 4, 2015.
- Microsoft (NASDAQ: MSTF) – Like Oracle, this company has seen its revenues fall, but it still performs well in the cash department. Microsoft reported a TTM revenue of $91.5 billion in September 2015 that fell to $90.76 billion in September 2014. Yet it also reported a net income of $12.27 billion, a free cash flow of $7.238 billion and cash and short-term investments of $99.36 billion on September 30, 2015. To that we can add a dividend yield of 2.29%. Like Cisco and Oracle, Microsoft is very cheap; it was trading at $54.26 a share on November 4, 2015.
These companies would be my choice for modern-day widows and orphans companies because of the cash that they generate. Naturally, a number of you have noticed that this list is heavy on technology. There’s a simple reason for that: Tech is where the money is these days. If you want companies that generate a lot of cash, these days you have to go to Silicon Valley.
Obviously, nothing here is set in stone, but these are the safest stocks I can think of these days. For those that need income from stocks, these equities will be good choices. They are also poised to grow or at least hold their own in revenue for the foreseeable future.
The bottom line is that widows and orphans stocks still exist. You just have to know where to look for them.