To invest in great businesses, you have to find them first. That’s where Warren Buffett comes in.
Warren Buffett’s portfolio is filled with quality high dividend stocks.
You can ‘cheat’ off of Warren Buffett’s own picks to find high quality dividend stocks for your portfolio. That’s because Buffett (and other institutional investors) are required to periodically show their holdings in a ’13F Filing’.
This article analyzes Warren Buffett’s top 4 stocks based on information disclosed in his newest 13F filing, published on August 14th, 2017:
Apple Inc. (NASDAQ:AAPL) is the largest company in the world based on its eye-popping market capitalization of $815 billion.
After years and years of purposefully avoiding technology companies because he found them difficult to understand, Buffett’s Apple position marks his second major (as measured by portfolio allocation) foray into the technology sector (after his IBM investment a few years earlier).
After an initial $1 billion investment, Buffett’s Apple stake quickly grew into one of his largest portfolio positions. The Oracle of Omaha has invested $18.8 billion of his shareholders’ capital into Apple, a position that amounts to 130,191,960 shares and 11.6% of his investment portfolio. Apple is Buffett’s third-largest position.
As a business, Apple needs no introduction. The company has one of the world’s most iconic brands, thanks to its popular iPhone, Mac, iPad and Apple Watch products.
While the popularity of its products is reason enough to investigate Apple’s stock, there’s also plenty of other characteristics that attract long-term dividend growth investors.
First and foremost is the company’s fantastic capital return program.
Thanks to an asset-light business model, high margins, and the sheer size of its business, Apple’s free cash flow generation is the envy of the technology industry (and, frankly, the rest of the stock market). The company’s cash hoard quickly became larger than the company’s cash requirements, which led Apple to initiate a dividend program in 2011 and begin one of the world’s most extraordinary share repurchase programs.
The progress on Apple’s capital remarkable return of capital program can be seen below.
Source: Apple Return of Capital Summary
Since the inception of Apple’s capital return program in 2012, the company has paid $57.4 billion in dividends and has repurchased $158.5 billion in company stock. Amazingly, the company’s cash position has continued to grow despite this significant capital return program.
In addition to Apple’s capital return program, Buffett is certainly pleased with the company’s recent financial performance.
Apple’s most recent quarter saw significant improvement on a number of important, fundamental financial metrics:
- 7% revenue growth
- 17% earnings-per-share growth
Apple is well-positioned for further growth thanks to its rapidly-growing Services segment and the continued popularity of its flagship iPhone product.
Quantitatively, Apple’s common stock is highly attractive right now.
Apple currently pays a quarterly dividend of $0.63 per share which yields 1.6% on the company’s current stock price of $157.50. Apple’s yield is not spectacular, but the company’s rapid dividend growth means that an investor’s yield on cost should grow quickly after initiating a position in this stock.
Apple’s valuation is where the company really stands out.
Apple is expected to report adjusted earnings-per-share of $9.10 in fiscal 2017 and the company’s stock currently trades at $157.50 for a price-to-earnings ratio of 17.3.
Many of Apple’s peers in the large-cap technology space (including Alphabet, Microsoft, and Facebook) are trading at price-to-earnings ratios closer to 30. Apple is a cheap opportunity to add high-growth technology exposure to a dividend growth investor’s portfolio.
The Coca-Cola Co
The Coca-Cola Co (NYSE:KO) is one of Warren Buffett’s most iconic investments. Buffett’s portfolio holds 400,000,000 shares of Coca-Cola with a market value of $17.9 billion, comprising 11.1% of the investor’s portfolio.
The Coca-Cola Company is the undisputed leader in the global beverage industry with a market capitalization of $194 billion.
Coca-Cola has been a profitable operation for decades and enjoys a high level of brand recognition and geographic diversity.
However, many investors believe that Coca-Cola’s best days are behind it.
This is not the case.
First of all, consider the sheer size of Coca-Cola’s business. The company manufactures more than 500 brands sold through more than 200 markets and generated 2016 net revenues of more than $42 billion.
Source: Coca-Cola April 2017 Investor Summary, slide 5
Additionally, and perhaps most importantly, the global beverage industry is expected to actually grow over the next several years.
In fact, between 2017 and 2019, the retail value of the global beverage industry is expected to grow at about 4% per year, although not much of this growth will come from Coca-Cola’s traditional sugary soft drinks.
Instead, the industry’s growth is expected to be generated by healthier alternatives like bottled water, value-added dairy, and juice drinks.
Source: Coca-Cola April 2017 Investor Summary, slide 6
In the meanwhile, Coca-Cola is repositioning its business to ensure its long-term growth prospects remain robust.
Namely, Coca-Cola is refranchising its bottling operations to allow the company to focus on its core competency of producing the syrups and concentrates that are the main ingredients for its end products.
By offloading its capital-intensive bottling operations, Coca-Cola will benefit from higher margins and a smaller, more nimble balance sheet compared to its pre-refranchising self.
Source: Coca-Cola April 2017 Investor Summary, slide 28
Coca-Cola currently pays a quarterly dividend of $0.37 per common share which yields 3.2% on the company’s current stock price of $45.67.
The company’s high dividend yield creates significant appeal for dividend investors.
However, the company’s valuation is not quite as attractive.
Coca-Cola is expected to report adjusted earnings-per-share of $1.85 in fiscal 2017 and the company’s stock currently trades at $45.67 for a price-to-earnings ratio of 24.7.
Coca-Cola’s valuation is slightly above the average price-to-earnings ratio in the S&P 500. While Coke is certainly a high-quality business, there are many better bargains available in the market today.
International Business Machines Corp.
Warren Buffett’s investment portfolio contains 54,084,673 shares of the International Business Machines Corporation with a quarter-end market value of $8.3 billion. Buffett’s IBM stake is 5.3% of his overall investment portfolio and the smallest position with an allocation above 5%.
IBM is a worldwide provider of software, business services, cloud solutions, and other technology services.
Founded in 1911, International Business Machines Corp. (NYSE:IBM) is one of the few technology companies to have stood the test of time. The company is headquartered in Armonk, New York and currently trades with a market capitalization of approximately $135 billion.
IBM’s business has been going through a significant transformation in recent years, and Buffett has not necessarily been pleased with the company’s execution of its strategic transition. The Oracle of Omaha has sold about one-third of his IBM stake over the past several quarters, with the IBM allocation currently sitting at 5.3% of his portfolio (down from 7.0% at the time of the last 13F filing).
The company’s transformation can be seen in its financial performance. In the second quarter, IBM’s revenue declined by 3% from the prior year’s period, which marked the 21st consecutive quarterly revenue decline for this technology behemoth.
However, there is still some endearing attributes about IBM’s financial performance. The company’s adjusted earnings-per-share increased by 1% in the quarter (with a significant boost from share repurchases), and IBM continues to be a robust cash generator. IBM has generated $10.8 billion of cash in the last twelve months and currently sits on a $12.3 billion cash balance.
Source: International Business Machines Second Quarter Earnings Presentation, slide 5
Long-term, IBM’s growth will be driven by its ‘Stratic Imperatives’ businesses, which are fast-growing units that are expected to offset a broader, secular decline among IBM’s legacy operations.
Strategic Imperatives revenue – which includes social, mobile, analytics, cloud, and security technologies – contributed $34.1 billion to quarterly revenue, an 11% (12% in constant currency) increase from the prior year’s period.
Source: International Business Machines Second Quarter Earnings Presentation, slide 4
Until the Strategic Imperatives businesses really take off, IBM will benefit from an enviable balance sheet.
Along with the company’s remarkable $12.3 billion in cash and marketable securities, the company has debt (excluding its leverage Global Financing unit) of just $16.6 billion, for a net debt figure of just $4.3 billion.
IBM is also highly shareholder-oriented. In the most recent quarter, the company spent $2.8 billion on dividend payments and share repurchases.
Source: International Business Machines Second Quarter Earnings Presentation, slide 10
IBM is highly attractive at the security level thanks to its above-average dividend yield and low price-to-earnings ratio.
IBM currently pays a quarterly dividend of $1.50 per share which yields 4.3% on the company’s current stock price of $139.70. The company’s dividend yield is more than twice as high as the ~2% average dividend yield in the S&P 500 Index, which makes it highly appealing for income-oriented investors.
IBM is also dirt cheap right now, thanks to widespread concerns that its Strategic Imperatives businesses will fail to offset declines in its legacy businesses.
Quantitatively, IBM is expected to report adjusted earnings-per-share of $11.95 in fiscal 2017 and the company’s stock currently trades at $139.70 for a price-to-earnings ratio of 11.7.
If IBM’s Strategic Imperatives businesses can drive a few consecutive quarters of meaningful revenue growth, then it is likely that IBM’s valuation will be catalyzed upwards and the company’s shareholders will be rewarded handsomely.
Goldman Sachs Group Inc
Warren Buffett’s investment portfolio contains 10,959,519 shares of the Goldman Sachs Group Inc (NYSE:GS) with a market value of $2.4 billion, constituting 1.5% of Berkshire’s overall investment portfolio.
Warren Buffett’s Goldman Sachs investment can be traced back to the 2007-2009 financial crisis when the Oracle of Omaha invested $5 billion of Berkshire Hathaway’s capital into the struggling financial institution.
For Goldman, Berkshire’s investment (and, more importantly, Warren Buffett’s vote of confidence) came at a critical time. Lehman Brothers had just collapsed, and the financial markets were pessimistic about Goldman’s future.
In exchange for its $5 billion investment, Berkshire Hathaway received:
- $5 billion of callable perpetual preferred stock, repurchased by Goldman in March of 2011 for $5.64 billion.
- Warrants for 43.5 million Goldman Sachs common stock with a strike price of $115 and an expiration date of October 1, 2013.
Warren Buffett holds most of his original Goldman Sachs stake today, indicating that he is still optimistic about the firm’s long-term investment prospects.
Indeed, there’s a lot to like about Goldman Sachs. The global investment bank and securities firm is a global leader in its industry, and benefits from significant brand recognition and talent supply.
Goldman Sachs operates in four primary business units:
- Investment Banking (21% of 2016 net revenues)
- Institutional Client Services (47% of 2016 net revenues)
- Investing & Lending (13% of 2016 net revenues)
- Investment Management (19% of 2016 net revenues)
Additional details about the operations and responsibilities of each business unit can be seen below.
Source: Goldman Sachs Presentation At The 2017 Credit Suisse Financial Services Conference, slide 3
The investment banking industry is a talent business. A firm’s success is highly dependent on its ability to attract, retain, and develop the most profitable employees.
This is where Goldman Sachs shines as an investment opportunity.
The firm’s culture is highly talent-focused, and Goldman consistently receives an amazing number of applications for each of its job postings. Case-in-point: Goldman received 131,000 applications for just 5,000 summer internships in the summer of 2015.
Source: Goldman Sachs Presentation At The 2017 Credit Suisse Financial Services Conference, slide 13
At the security level, Goldman Sachs’ dividend yield might discourage investors who focus solely on generating portfolio income.
More specifically, Goldman Sachs currently pays a quarterly dividend of $0.75 per share which yields 1.4% on the company’s current stock price of $222.15. Goldman’s yield is significantly lower than the ~1.9% average dividend yield in the S&P 500 Index.
With that said, Goldman is trading at a highly attractive valuation relative to the broader stock market and most of its peers in the financial services industry.
Goldman Sachs is expected to report adjusted earnings-per-share of $19.95 in fiscal 2017 and the company’s stock currently trades at $222.15 for a price-to-earnings ratio of 11.1. Goldman’s low price-to-earnings ratio makes the stock an appealing investment for value-oriented investors looking to add some financial exposure to their investment portfolio.