These 3 cash-generating machines will help you sleep at night

The S&P500 is officially in a bear market and off to its worst start in over 50 years.

Bear markets can be mentally taxing, but they all end eventually and can be opportunities to buy big companies at discounted prices. Companies with competitive advantages and strong cash flow can generate above-market returns over the long term and are also well positioned to capitalize during market downturns. Here are three consistently money-making businesses you can add to today — and which should help you sleep a little easier at night.

Image source: Getty Images.

1. Mastercard

MasterCard (MY 0.88%) operates the world’s second largest payment network, helping customers transfer money around the world through its credit and debit cards and other payment products.

Mastercard’s payment network gives the company a major competitive advantage due to the network effect, which means that as the network grows, it is more difficult for competitors to enter and withdraw. Business. The network effect is also the reason why Mastercard and Visa dominate the payments market, holding 90% of the credit and debit card markets.

You can visualize this competitive advantage by looking at Mastercard’s profit margin, which has averaged nearly 40% over the past decade. Mastercard’s business is also relatively asset-constrained, and its free cash flow, or the cash remaining after paying operating and capital expenditures, grew at a compound annual growth rate of nearly 13% in course of the last decade.

MA Free Cash Flow Statement

MA Free Cash Flow given by Y-Charts

High free cash flow helps Mastercard reward investors through dividends and stock buybacks, and allows it to ride the waves through different economic cycles. While other companies are playing defense as economic uncertainty continues, Mastercard can play offense and make acquisitions at deep discounts — among the reasons it could be a great addition to your portfolio.

2. S&P Global

S&P Global (SPGI 1.86%) provides ratings to companies around the world and is an integral part of the debt markets. When companies want to raise cash by selling debt, credit rating agencies such as S&P Global assess companies’ risks and assign ratings that determine how much interest they pay.

Regulations make it difficult to enter the credit rating industry. This high barrier to entry gives S&P Global a huge advantage, and that’s why S&P Global has a 40% market share, about the same as Moody’s Corporation.

This competitive advantage translates into high gross profit margins, which have averaged nearly 70% over the past decade. These high margins are a key reason why S&P Global’s free cash flow has grown at a rate of 15% compounded annually.

SPGI Gross Profit Margin Chart

SPGI gross profit margin given by Y-Charts

One thing to keep in mind is that 50% of S&P Global’s revenue comes from its credit rating business – which has slowed significantly this year as debt issuance fell 35% in the United States. Despite this, S&P Global’s other business units, such as research, analytics and index products, grew 51% year over year, and the company’s total revenue increased. compared to last year.

S&P Global’s position as a leading rating agency and its asset-light business model make it another outstanding cash-generating stock you can add today that will help you sleep well at night.

3. Progressive

progressive (RMP 1.90%) primarily writes auto insurance policies for individuals and businesses. The company has developed a competitive advantage by evaluating its policies by analyzing driving behavior, known as telematics.

Telematics is a technology that tracks driving behavior using data collected from a device in your car or through the app on your phone. Data collected by Progressive includes things like mileage, speed, braking time, and time of day. It then develops personalized fares, which can grant drivers discounts for safe driving. Progressive made it widely available in 2011 with its Progressive Snapshot product, giving it a first-mover advantage.

This technological advantage has translated into beneficial and profitable policies for Progressive for years. One way to measure profitability in the insurance industry is the combined ratio. This ratio is the total losses resulting from insurance claims plus operating expenses divided by the total premiums earned. A ratio below 100% means a company writes policies for profit; the lower the percentage, the better. Progressive’s combined ratio has consistently outperformed the industry for 20 years now.

A chart shows Progressive's combined ratio to the industry since 2002.

Data source: 10-K Progressive Filings, Statista and NAIC for P&C industry averages. Table by author.

This strong underwriting ability is why Progressive’s free cash flow has grown at a rate of 17% compounded annually over the past decade.

PGR Free Cash Flow Statement

RMP free cash flow given by Y-Charts

Progressive faces growing threats as more companies integrate telematics into their operations. However, the company has data years ahead of the competition, which should help it continue to outperform the industry.

Progressive’s technology and attention to detail in writing profitable policies make it another great cash-generating stock that you can add to your portfolio and help you rest easy.

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