Key Points
Berkshire Hathaway is a huge conglomerate that generates significant cash flow.
American Express operates a closed-loop payment network and attracts high-income consumers with its branding.
Progressive is a leading auto insurer with a proven track record of stellar underwriting and long-term returns for investors.
Financial companies are the backbone of the global economy, including everything from lending to insurance to commerce. As the economy grows, these businesses grow alongside it, making them compelling investments for those looking to build wealth.
Financial stocks like Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB), American Express (NYSE: AXP), and Progressive(NYSE: PGR) have made investors rich during the past several decades.
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Although they may not be the flashiest names, these companies hold strong competitive advantages and boast proven track records, making them valuable investments for a diversified portfolio. Here's why these three stocks can continue to deliver for long-term investors.
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1. Berkshire Hathaway is a cash-generating machine
Berkshire Hathaway is a sprawling conglomerate with businesses spanning finance, transportation, materials, consumer goods, and energy, among others. At the heart of Berkshire's business is its enormous insurance operations, which include GEICO, Berkshire Hathaway Reinsurance, and Allegheny. These businesses help generate steady cash flow for the conglomerate, which is a major reason its cash pile continues to grow.
Last year, Berkshire earned $19.8 billion from its insurance operations, accounting for nearly 30% of the company's total profit. What makes Berkshire particularly compelling is its huge cash stockpile, which was more than $373 billion at the end of last year.
This huge stockpile gives Berkshire the flexibility to add to its public stock portfolio, make acquisitions, and use it to buy back its own shares. In January, Berkshire spent $9.7 billion to acquire OxyChem from Occidental Petroleum.
Berkshire Hathaway is entering a new era under Chief Executive Officer Greg Abel, and it will be interesting to see how things unfold. But the business continues to fire on all cylinders and is sitting on a gigantic pile of cash to put to work, which is why I think it remains an excellent financial stock for investors seeking diversification.
2. American Express's brand is a competitive advantage
American Express is one of the top credit card companies in the U.S. today. Although it competes with Visa and Mastercard for a share of the card market, unlike its rivals, American Express operates a closed-loop payment network. That means it's not only processing payments and earning fees, but also holding the credit card loans it extends and collecting interest on them, providing it with upside from elevated interest rates.
Its biggest strength and competitive advantage is its brand prestige. The company has spent decades building an image associated with luxury and the finer things in life, and as a result, it attracts a higher-income, higher-spending consumer. Its user base provides it with stability, as these customers can better navigate more difficult economic environments, such as recessions or inflation.
In mid-April, American Express said it would acquire Hypercard, a specialist in "agentic expense management," as the company looks to stay ahead of the curve and utilize artificial intelligence (AI) to automate complex commercial expense workflows.
The company continues to expand and has successfully pivoted to reach younger demographics, with more than 65% of new card customers coming from millennials or Gen Z. For investors seeking exposure to the growing spending trends in the economy, American Express is an excellent choice.
3. Progressive is a powerhouse in the insurance industry
Progressive is one of the largest automotive insurers in the U.S., and during the past three decades, the stock's average annual return has been just under 17%. These stellar returns are a result of the company's underwriting ability, where it has shown it can price risk more accurately than competitors.
Progressive has consistently generated a profit on the policies it underwrites. One vital metric that tracks this is the combined ratio, which is the ratio of losses and expenses to premiums collected. A ratio of less than 100% indicates a company is profitable, with a lower ratio indicating higher underwriting profits. During the past 20 years, Progressive's combined ratio has averaged 92%, well below the industry average of 99%.
Another benefit to Progressive investors is that they share in the profits when the company has a stellar operating year. For example, last year the company reported net income of $11.3 billion and it paid a special dividend of $13.50 per share, representing a 6.3% yield as of the early January record date.
For investors seeking stability and long-term growth, with occasional dividend upside potential, Progressive is another top financial stock to buy today.
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American Express is an advertising partner of Motley Fool Money. Courtney Carlsen has positions in American Express, Berkshire Hathaway, Occidental Petroleum, and Progressive. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, Progressive, and Visa. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
