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.

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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’.

Free Excel Download: Get a free Excel Spreadsheet of all 47 of Warren Buffett’s stocks, complete with metrics that matter – including P/E ratio and dividend yield. Click here to download Buffett’s holdings now.

This article analyzes Warren Buffett’s top 20 stocks based on information disclosed in his newest 13F filing, published on August 14th, 2017.

How To Use Warren Buffett’s Portfolio To Find Investment Ideas

Having a database of Warren Buffett’s top stocks is more powerful when you have the ability to filter it based on important investing metrics.

That’s why this article’s Excel download is so useful…

It allows you to search Warren Buffett’s portfolio to find dividend investment ideas that match your specific portfolio.

For those of you unfamiliar with Excel, this section will show you how to filter Warren Buffett’s portfolio for two important investing metrics – price-to-earnings ratio and dividend yield.

Step 1: Click on the filter icon in the column for dividend yield or price-to-earnings ratio.

Warren Buffett's Top Stocks Excel Screenshot 1

Step 2: Filter each metric to find high-quality stocks. Two examples are provided below.

Example 1: To find stocks with dividend yields above 1% and list them in descending order, click the ‘Dividend Yield’ filter and do the following:

Warren Buffett's Top 20 Highest Conviction Stock Picks

Example 2: To find stocks with price-to-earnings ratios below 25 and list them in descending order, click the ‘Price-to-Earnings Ratio’ filter and do the following:

Warren Buffett's Top Stocks Excel Screenshot Additional Example

Table of Contents

You can skip to an analysis of any of Warren Buffett’s 20 top stock holdings with the table of contents below. Stocks are listed in order from smallest percentage of Buffett’s portfolio to largest percentage of Buffett’s portfolio.

Warren Buffett & Dividend Stocks

Buffett has grown his wealth by investing in and acquiring businesses with strong competitive advantages trading at fair or better prices.

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Most investors know Warren Buffett looks for quality, but few know the degree to which he invests in dividend stocks:

  • 91% of Warren Buffett’s portfolio is invested in dividend stocks
  • His top 4 holdings have an average dividend yield of 2.6% (and make up 56% of his portfolio)
  • Many of his dividend stocks have paid rising dividends over decades

Warren Buffett prefers to invest in shareholder friendly businesses with long track records of success.

Warren Buffett’s Recent Investment Activity

The most notable activity in Warren Buffett’s investment portfolio this year was his investment in Synchrony Financial (SYF).

Synchrony Financial is not a top 20 holding in Warren Buffett’s investment portfolio, so the stock does not have a dedicated section in this article. However, since the company was Warren Buffett’s only previously-unannounced purchase revealed in his 13F filing, the company’s business model, growth prospects, and valuation deserves some discussion in this article.

Synchrony Financial is a retail finance company that specializes in offering private-label credit cards to third-party merchants. Headquartered in Stanford, Connecticut, Synchrony Financial has a market capitalization of $23.8 billion. Buffett’s Berkshire Hathaway owns 4,934,756 shares of Synchrony Financial worth approximately $520.7 million.

Synchrony has a very short history as a publicly-traded company. Until recently, Synchrony operated as a wholly-owned subsidiary of General Electric. Synchrony’s initial public offering was completed on July 31, 2014, when General Electric sold 125 million shares to the public at a price of $23.00 per share.

The offering raised $2.88 billion for GE, which retained 85% of Synchrony after the IPO. General Electric has divested of most of this 85% stake since then (Value Line reports Synchrony’s largest shareholder to be Blackrock with a 6.3% stake).

So why did Buffett invest in Synchrony Financial?

It appears to be a way to diversify and increase his stake in the financial sector. Buffett already has significant investments in Wells Fargo (his second-largest stock holding), American Express, U.S. Bancorp, Moody’s, the Bank of New York Mellon, and the Bank of America (through warrants, which he is expected to exercise in the near future).

Synchrony Financial’s valuation certainly helped Buffett (or one of his investment associates) take note of this stock. Synchrony Financial reported adjusted earnings-per-share of $2.71 in fiscal 2016, and trades at a stock price of $30.22 for a price-to-earnings ratio of 11.2.

A price-to-earnings ratio of 11.2 is a significant bargain in today’s market. For context, the average price-to-earnings ratio in the S&P 500 is about 24.2 right now… which means Synchrony is attractively priced for value-focused investors like Buffett.

The stock also pays a reasonable dividend, yielding 2.0% at current prices (a tick above the S&P 500’s average dividend yield of 1.9%).

Quantitatively, there’s a lot to like about Synchrony Financial. Warren Buffett is not the only super-investor who has taken notice.

Seth Klarman’s Baupost Group has invested a significant sum in Synchrony Financial – the stock is his fund’s second-largest position, composing ~10% of the portfolio with a market value of nearly $900 million.

All signs indicate that there is something special here. We will be following Buffett’s investment in Synchrony closely, and would not be surprised if the Oracle of Omaha adds more shares in the near future.

In addition to Warren Buffett’s investment in Synchrony Financial, Buffett’s other notable portfolio addition in the quarter was a $377 million investment in STORE Capital (STOR), a triple net lease REIT with a market capitalization of ~$4 billion. We investigated Buffett’s investment in this REIT in a previous Sure Dividend article:

Warren Buffett also added to his stakes in the Bank of New York Mellon (+50%), General Motors (+20%), and Apple (though only slightly, +0.6%).

Berkshire reduced its holdings in the following companies:

  • Wells Fargo: this is likely some position trimming to keep Buffett’s stake below 10% of the overall Wells business, as required by the banking regulators
  • International Business Machines: Buffett has become disenchanted with this stock, saying, “I don’t value IBM the same way that I did six years ago when I started buying … I’ve revalued it somewhat downward.” Buffett also said, “IBM is a big strong company, but they’ve got big strong competitors, too.” This interview has more details on Buffett’s reduced stake in IBM.
  • Delta Air Lines
  • American Airlines
  • United Continental Holdings
  • Sirius XM Holdings
  • Wabco Holdings

Buffett also completely divested his General Electric (GE) stake, which composed a negligible 0.19% of Berkshire’s investment portfolio at the time of the previous 13F filing.

Interestingly, Buffett’s General Electric divestiture coincided with his investment in their previous Synchrony Financial credit card unit. It is possible that Buffett was more interested in General Electrics financial operations (which the company has been steadily selling off since the financial crisis) than GE’s more traditional industrial operations.

#20 – USG Corporation (USG)

Dividend Yield: N/A (USG does not currently pay a quarterly dividend)
Adjusted Price-to-Earnings Ratio: 13.5
Percent of Warren Buffett’s Portfolio: 0.74%
10 Year Total Return CAGR: -3.8%

Warren Buffett has a $1.1 billion investment in the USG Corporation, equating to 39,002,016 shares and 0.74% of the overall investment portfolio. Berkshire became USG’s largest shareholder in 2013 when it exercised its position of USG convertible bonds acquired in 2008. Berkshire’s position is unchanged from the prior 13F filing.

The USG Corporation – also known as United States Gypsum – is the United States’ leading manufacturing of gypsum wallboard, joint adhesives, and other raw materials necessary for the construction and remodelling industry.

Founded in 1902, USG is headquartered in Chicago, Illinois and has a market capitalization of approximately $4 billion.

Because of its reliance on the construction and remodelling industries to drive the sales of its raw materials, USG is a highly cyclical business. The company has executed significant bankruptcy reorganizations twice in its history: in 1993 and in 2006.

However, USG’s recent financial performance has been much better. In the most recent quarter, USG reported net sales growth of 5% and adjusted diluted earnings-per-share growth of 4.8% (from $0.42 to $0.44). The company’s growth was driven by fundamental improvements in its main markets: U.S. wallboard volumes improved 10% from the prior year’s period, while many of the company’s manufacturing costs remained flat year-on-year.

USG Corporation Q2 2017 Highlights

Source: USG Corporation Second Quarter Investor Presentation, slide 4

While flat manufacturing costs contributed to USG’s growth in the most recent quarter, this is not a trend that is expected to continue.

In fact, an inflationary cost environemtn is expected to have a significantly negative impact on USG’s performance going forward. USG is expected mid-single-digit cost inflation in each of its three primary operating units (U.S. Wallboard Products, U.S. Surfaces & Substrates Products, and U.S. Ceilings Products).

USG Corporation Mitigating An Inflationary Environment

Source: USG Corporation Second Quarter Investor Presentation, slide 5

However, USG’s long-term growth prospects appear bright (and Warren Buffett’s investment shows that the Oracle of Omaha clearly agrees).

USG continues to invest heavily in its business, expecting to spend $200 million on capital expenditures in the full-year of fiscal 2017.

In addition, USG will continue to benefit from a unique tax situation. The company is carrying forward about $1.3 billion of net operating losses, which means it will pay no cash taxes for the foreseeable future. This is a tremendous benefit to USG’s near-term cash flows.

USG Corporation 2017 Financial Outlook

Source: USG Corporation Second Quarter Investor Presentation, slide 13

USG does not currently pay a quarterly dividend, which makes it an unappealing investment to the majority of the readers of Sure Dividend.

However, the stock’s attractive valuation may partially compensate for USG’s lack of dividend payments, particularly for investors that are not looking to generate current portfolio income.

Quantitatively, USG is expected to report adjusted earnings-per-share of $1.95 in fiscal 2017, and its stock is currently trading at $26.31 for an adjusted price-to-earnings ratio of 13.5 (using 2017’s expected earnings).

A price-to-earnings ratio of 13.5 is trading at a significant discount to the S&P 500’s current price-to-earnings ratio of 24.2. USG Corporation’s attractive valuation combined with its backing from Warren Buffett suggest that this stock merits further research and a potential buy recommendation.

#19 – VeriSign, Inc. (VRSN)

Dividend Yield: N/A (VeriSign does not currently pay a quarterly dividend)
Adjusted Price-to-Earnings Ratio: 25.2
Percent of Warren Buffett’s Portfolio: 0.8%
10 Year Total Return CAGR: 14.5%

Buffett’s Berkshire Hathaway investment portfolio holds 12,952,745 shares of VeriSign, In.c with a market value of $1.2 billion, worth 0.8% of the overall portfolio.

VeriSign is a globally diversified provider of domain name registry services and Internet security software. The company operates in a single segment, and has a significant international presence with 42% of 2016’s net sales being generated outside of the United States.

VeriSign was founded in 1995, is headquartered in Reston, Virginia, and trades at a market capitalization of $9.9 billion.

On the surface, Warren Buffett’s VeriSign investment is highly puzzling. The Oracle of Omaha has been vocally skeptical of technology companies, and VeriSign is only the third technology holding in his top 20 (behind IBM and Apple, the latter of which is a top 3 position).

Importantly, VeriSign was not a recent purchase. Buffett originally purchased VeriSign in the fourth quarter of 2012, when the stock was trading around $35-$40. For context, VeriSign reported adjusted earnings-per-share of $1.91 in fiscal 2012, which implies that Buffett paid – at most – around 20.9x earnings for his initial VeriSign stake.

Perhaps more importantly, Buffett’s originally-purchased VeriSign shares have more than doubled since he originally purchased them (the stock is trading just shy of $100 per share at the time of this writing).

And, the future looks bright for VeriSign. The business benefits from a number of secular tailwinds, including the ever-increasing use of the Internet.

The company’s second quarter financial performance was indicated of these tailwinds. VeriSign reported 9.2 million new domain name registrations in the quarter, with a first quarter renewal rate of 72.5%.

VeriSign’s high renewal rate gives the company a recurring revenue business model, something that would certainly appeal to a conservative investor like Warren Buffett.

Additional details about VeriSign’s performance in the most recent quarter can be seen below.

 

VRSN Registry Services Highlights 9.2

Source: VeriSign Second Quarter Investor Presentation, slide 5

VeriSign’s business is remarkably stable, particularly given that it is a technology company.

In the following diagram, VeriSign displays the trend of its quarterly revenue, which has been steadily increasing over the past several years with only one instance of negative quarter-over-quarter revenue growth.

VRSN Q2 2017 Financial Performance

Source: VeriSign Second Quarter Investor Presentation, slide 6

However, the company is very small, certainly one of the smaller companies in Warren Buffet’s investment portfolio. VeriSign’s market capitalization is less than $10 billion and the company had less than 1,000 full-time employees at the end of the most recent financial quarter.

Looking ahead, VeriSign’s growth will be driven by a continued increase in the number of websites, which it already services a large number of.

The growing use of the Internet means that VeriSign should continue to realize modest growth even if it can just maintain its current level of market share.

VRSN VeriSign Registry Services Highlights

Source: VeriSign Second Quarter Investor Presentation, slide 4

VeriSign does not currently pay a quarterly dividend, which makes it unappealing to many Sure Dividend readers.

In addition, VeriSign is one of the few stocks on this list that is overvalued right now. The company is expected to report 2017 adjusted earnings-per-share of $3.90 and currently trades at a stock price of $98.20 for an adjusted price-to-earnings ratio of 25.2.

For context, the average price-to-earnings ratio within the S&P 500 is 24.2, which means that VeriSign is trading at a premium to this broad barometer of stock market financials.

So why does Warren Buffett continue to hold VeriSign?

Well, keep in mind that Buffett’s original purchase of VeriSign was at a price less than half of the current value. Selling the stock now would trigger a significant capital gain, resulting in an unnecessary payment of capital gains tax.

For now, Buffett continues to hold VeriSign, but he is not a buyer at current prices. Buffett’s stake in VeriSign has remained unchanged since the prior quarter’s 13F filing.

#18 – General Motors Company (GM)

Dividend Yield: 4.4%
Adjusted Price-to-Earnings Ratio: 5.6
Percent of Warren Buffett’s Portfolio: 1.3%
10 Year Total Return CAGR: N/A

Warren Buffett’s investment portfolio contains 60,000,000 shares of the General Motors Company with an aggregate market value of $2.1 billion. Buffett’s General Motors investment represents a 1.3% allocation within his common stock portfolio.

For many, General Motors is a company that needs no introduction, as it is the largest automobile manufacturer in North America based on market share (coming in at 16.6% in fiscal 2016).

Among the investment community, General Motors does not have the same popularity as it does among consumers. The company is notorious for its highly-publicized bankruptcy proceedings that occurred during the 2007-2009 financial crisis.

After much restructuring and assistance from the U.S. Treasury, General Motors was re-listed on the New York Stock Exchange in 2010. And, the company’s financial performance since that time has been much superior to its pre-bankruptcy comparisons.

Take the most recent quarter as an example. General Motors reported adjusted return on invested capital (adjusted ROIC) of 30.4%, and adjusted earnings-per-share of $1.60. The company’s year-to-date financial performance is similarly strong. Adjusted earnings-per-share of $3.35 represents a 12.4% increase from the prior year’s period.

GM General Motors Second Quarter 2017 Continuing Operations Performance

Source: General Motors Second Quarter Earnings Presentation, slide 4

The most notable characteristic of General Motors’ recent financial performance is the firm’s extraordinarily high return on invested capital.

This is intentional: General Motors has been deliberately working to increase this figure over time, an initiative which has been very successful.

GM General Motors Strong History of ROIC-Adjusted Improvement

Source: General Motors Presentation at the 2017 J.P. Morgan Auto Conference, slide 14

General Motors’ high ROIC is unsurprisingly caused by the company’s disciplined capital allocation.

GM has three guiding principles when it makes capital allocation decisions:

  1. The firm targets an $18 billion cash buffer (which is important, since GM is in such a cyclical business)
  2. GM targets an investment grade balance sheet (a credit rating of BBB or higher from S&P)
  3. Excess cash will be reinvested in the business, but only in opportunities that are seen as having a 20% ROIC or higher

Beyond these three principles, GM returns all available free cash flow to its shareholders in the form of dividend payments or share repurchases.

GM General Motors Disciplined Capital Allocation Framework

Source: General Motors Presentation at the 2017 J.P. Morgan Auto Conference, slide 12

General Motors’ historical capital returns have been very generous.

For instance, in the past five years, the company has returned more than 45% of its current market capitalization to its shareholders via dividend payments and share repurchases.

For fiscal 2017, GM is expecting to spend about twice as much on share repurchases as it will on dividend payments. Later, I’ll show that GM’s shares are meaningfully undervalued – this low valuation means that the company’s current share repurchases will build significant shareholder value, particularly if the buybacks are continued steadily over long periods of time.

GM General Motors History of Returning Significant Cash to Shareholders

Source: General Motors Presentation at the 2017 J.P. Morgan Auto Conference, slide 16

General Motors is the first stock on this list that pays a dividend, and its above-average yield makes it a very appealing security for income-oriented investors.

More specifically, General Motors currently pays a quarterly dividend of $0.38 per share which yields 4.4% on the company’s current stock price of $34.83.

GM is also trading at a very compelling valuation.

General Motors is expected to report adjusted earnings-per-share of $6.20 in fiscal 2017 and the company’s stock currently trades at $34.83 for an adjusted price-to-earnings ratio of 5.6.

A price-to-earnings ratio of 5.6x is far too low for a high-quality, blue-chip company with positive expected earnings-per-share growth. To put it simply, General Motors is a screaming buy at current prices.

Buffett clearly thinks so too. The Oracle of Omaha added 10,000 shares of General Motors to his investment portfolio during the most recent quarter, which increased his stake by 20%.

When Buffett buys a stock, I tend to pay attention. Buffett’s interest combined with General Motors’ sky-high dividend yield and rock-bottom valuation make this stock an appealing buy at current prices.

#17 – United Continental Holdings, Inc. (UAL)

Dividend Yield: N/A (United does not currently pay a quarterly dividend)
Adjusted Price-to-Earnings Ratio: 8.2
Percent of Warren Buffett’s Portfolio: 1.3%
10 Year Total Return CAGR: 5.5%

Warren Buffett’s investment portfolio holds 28,211,563 shares of United Continental Holdings (commonly called United) with an aggregate market value of $2.1 billion at the time of the last 13F filing. United is Buffett’s smallest holding in the airline industry, with a portfolio stake of 1.3%.

United is the third-largest airline in the United States (as measured by revenue) and trades at a current market capitalization of $21 billion.

United Continental Holdings operates two distinct airline businesses:

  • United Air Lines, Inc.
  • Continental Airlines, Inc.

These two airlines merged in 2010, which saw United’s previous holding company – the UAL Corporation – change its name to the current United Continental Holdings. The new, combined entity is headquartered in Chicago, Illionois.

United’s recent financial performance has exceeded investor expectations.

In the second quarter of 2017, the company’s adjusted earnings-per-share increased 5.4% from the same period a year ago, driven by strong, fundamental airline operating performance.

UAL United EPS Including Special Charges

Source: United Continental Holdings Second Quarter Earnings Presentation, slide 4

In the quarter, United ranked first among its competitors in completion rates, on-time departures, and on-time arrivals.

The company also had the second-lowest mishandled bag ratio in its peer group.

Additional details about United quarterly performance on various airline-specific operating metrics can be seen in the following diagram.

UAL United Best Second Quarter Airline Operations Among Major Competitors

Source: United Continental Holdings Second Quarter Earnings Presentation, slide 6

In the quarter, United continued to allocate capital to two important initiatives:

  • Funding its unfunded pension program
  • Returning capital to shareholders via share repurchases

Importantly, United does not pay a dividend, so share repurchases are the company’s singular method to deliver capital to its stockholders. United’s significant share repurchases show that it is a shareholder-friendly company despite its lack of dividend payments; United has repurchased 6% of its shares outstanding over the last year, at an average share price below the current quotation.

UAL Balance Sheet And Capital Allocation Update

Source: United Continental Holdings Second Quarter Earnings Presentation, slide 15

While United does not pay a dividend, the company’s appealing valuation makes it a potential buy for investors that do not necessarily need current income.

More specifically, United is expected to report adjusted earnings-per-share of $7.85 in fiscal 2017, and the company’s stock currently trades at $64.75 for a price-to-earnings ratio of 8.2x.

For context, the S&P 500 is trading at a price-to-earnings ratio of 24.2 right now. United is significantly undervalued relative to the broader stock market, a trend that holds for most of the airline industry because of its poor recession performance.

Warren Buffett seems to think that the airline industry has turned a corner. Last year, the Oracle of Omaha made a broad-based bet on the airline industry by investing billions of dollars into the U.S. ‘big four’. Some have even speculated that Buffett will eventually acquire an airline business in its entirety.

In any case, the low valuations of United (and Buffett’s other airline holdings) make them appealing opportunities for pure-value investors.

#16 – American Airlines Group, Inc. (AAL)

Dividend Yield: 0.9%
Adjusted Price-to-Earnings Ratio: 10.1
Percent of Warren Buffett’s Portfolio: 1.5%
10 Year Total Return CAGR: N/A

Berkshire Hathaway owns 47,000,000 shares of American Airlines Group with a market value of $2.4 billion (or 1.5% of the company’s portfolio of common stock investments). American Airlines is Buffett’s third-largest holding in the airline industry.

When measured on a number of important, industry-specific operating metrics, American Airlines is the largest airline company in the world.

With that said, the current American Airlines is a relatively young corporate entity. In 2011, the AMR Corporation (the parent company of the ‘old’ American Airlines) filed for bankruptcy protection. After bankruptcy proceedings and a transformative merger with U.S. Airways, the ‘new’ American Airlines was created in December of 2013.

Since American Airlines emerged from this transformative time period, the company has been laser-focused on creating a new corporate culture that encourages long-term thinking. The company believes that managing its business for the short-term is one of the primary causes of its 2011 bankruptcy proceedings.

One of the most quantifiable ways that American Airlines can benefit from long-term thinking is by closing its revenue gap relative to its other competitors.

On every flight, American Airlines generates less revenue (as measured by Passenger Revenue Per Available Seat Mile, or PRASM) than its other two major competitors. By thinking for the long-term and investing in its products, customer experience, and other factors that it can leverage to increase prices, American Airlines could realize significant revenue upside.

AAL American Airlines The Danger of Short-Term Thinking

Source: American Airlines 2017 Annual Meeting Presentation

American Airlines’ newfound focus on long-term thinking can be seen when looking at the company’s capital expenditures over the past several years.

Relative to its two major peers, American Airlines has consistently devoted the most capital to organic reinvestment. Granted, some of this outsized capex can be attributed to American Airlines’ larger size, but this significant and steady pace of capital investment should be noted by the company’s long-term investors.

AAL American Airlines Unprecendeted Product Investment

Source: American Airlines 2017 Annual Meeting Presentation

American Airlines has also been a vicious repurchaser of company stock since its merger with U.S. Airways.

In the four years since the transformative merger, American Airlines has brought its share count down from 756 million to 496 million – a remarkable reduction of 34%.

AAL Allocating Capital With Long-Term Focus

Source: American Airlines 2017 Annual Meeting Presentation

Share repurchases are not the only technique used by American Airlines to return capital to shareholders. American Airlines currently pays a quarterly dividend of $0.10 which yields 0.9% on the company’s current stock price of $45.55.

American Airlines low dividend yield makes it unappealing for investors whose primary objective is to generate portfolio income.

However, the company’s attractive valuation partially makes up for its disappointing dividend yield.

American Airlines is expected to report adjusted earnings-per-share of $4.50 in fiscal 2017, which implies that its current stock price of $45.55 is trading at a price-to-earnings ratio of 10.1.

American Airlines’ valuation is significantly lower than the average price-to-earnings ratio in the broader stock market. Accordingly, this stock appeals to value-focused investors (with Warren Buffett being the most notable example).

You can read more Sure Dividend analysis on American Airlines at the following link:

#15 – The Goldman Sachs Group, Inc. (GS)

Dividend Yield: 1.4%
Adjusted Price-to-Earnings Ratio: 11.1
Percent of Warren Buffett’s Portfolio: 1.5%
10 Year Total Return CAGR: 3.4%

Warren Buffett’s investment portfolio contains 10,959,519 shares of the Goldman Sachs Group 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.

GS Goldman Sachs Committed To Meeting The Needs Of Our Clients Round Two

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.

GS Goldman Sachs Our People And Our Franchise

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.

You can read more Sure Dividend analysis on the Goldman Sachs Group at the following link:

#14 – DaVita Inc. (DVA)

Dividend Yield: N/A (DaVita does not currently pay a quarterly dividend)
Adjusted Price-to-Earnings Ratio: 15.0
Percent of Warren Buffett’s Portfolio: 1.5%
10 Year Total Return CAGR: 7.6%

The Oracle of Omaha’s investment portfolio contains 38,565,570 shares of DaVita, Inc., equating to a total investment of $2.5 billion at the time of the last 13F filing. DaVita is about 1.5% of Berkshire’s overall investment portfolio.

DaVita specializes in kidney care, particularly dialysis treatments, for more than 189,000 patients served via 2,382 kidney care locations across the United States.

While the kidney care industry appears to be very specialized on the surface, this industry is surprisingly large. DaVita’s Kidney Care business generated $10.7 billion of net revenue over the past twelve month, and is expected to generate between $1.525 billion and $1.625 billion of operating income during fiscal 2017.

DVA DaVita Kidney Care At A Glance

Source: DaVita 2017 Capital Markets Day Presentation, slide 17

DaVita’s typical dialysis center serves up to 80 patients at one time, with 17 teammates including 5 nurses, 8 technologists, and 4 other employees. Each dialysis center is led by a Medical Director and generates about $4 million in annualized revenue.

DVA DaVita Typical Dialysis Center

Source: DaVita 2017 Capital Markets Day Presentation, slide 16

DaVita is not a rapidly-growing business, but it compensates for this by being an industry leading in a slow-changing and recession-resistant business. Patients are unlikely to forego their essential dialysis treatments just because the broader economy is experiencing an isolated economic recession.

Looking ahead, DaVita is expecting to realize operating income growth between 2%-7%, driven by an increase in the number of treatments, an increase in revenue per treatment, and a small negative impact from an increase in the expenses incurred per treatment.

DVA DaVita Outlook

Source: DaVita 2017 Capital Markets Day Presentation, slide 36

DaVita does not currently pay a quarterly dividend, which makes it unappealing for many Sure Dividend readers. With that said, the stock may merit further research depending on its current valuation.

DaVita is expected to report adjusted earnings-per-share of $3.75 in fiscal 2017 and the company’s stock is currently trading at $56.23 for a price-to-earnings ratio of 15.0. DaVita’s valuation is reasonable, and likely one of the reasons why Warren Buffett continues to hold this stock.

However, Buffett is not a buyer of DaVita at current prices – the Oracle of Omaha’s DaVita position was unchanged in his most recent 13F filing.

#13 – The Bank of New York Mellon Corporation (BK)

Dividend Yield: 1.8%
Adjusted Price-to-Earnings Ratio: 14.7
Percent of Warren Buffett’s Portfolio: 1.6%
10 Year Total Return CAGR: 3.8%

Berkshire Hathaway’s common stock portfolio contains 50,229,588 shares of the Bank of New York Mellon Corporation with a market value of $2.6 billion.

The Bank of New York Mellon Corporation is a global financial services institution that specializes in asset management, custodial services, and wealth management.

BNY Mellon’s predecessor, the Bank of New York, was founded in 1784 and today the financial institution trades with a market capitalization of $56 billion.

Interestingly, Buffett bolstered his BNY Mellon stake significantly in the most recent quarter. The Oracle of Omaha added an additional 17 million shares of this bank to his investment portfolio, a sum that increased his share count by ~52%. In the quarter prior, Buffett had accumulated 11 million additional shares.

As a result, BNY Mellon is now the 13th largest position in Warren Buffett’s investment portfolio, with the position’s dollar value more than doubling from the beginning of the year.

It’s tough to say why Warren Buffett is adding to his stake in the Bank of New York Mellon, particularly given that he is already heavily overweight the financials sector. It could be that Buffett is trying to position his portfolio to benefit from rising interest rates.

If that is indeed the case, then BNY Mellon appears to be a good choice. The company’s recent financial performance has been excellent, with the most recent quarter exhibiting 5% revenue growth, 12% EBIT growth and a 22.1% return on tangible common equity.

BNY Bank of New York Mellon Summary Financial Results For Second Quarter of 2017

Source: Bank of New York Mellon Second Quarter Earnings Presentation, slide 4

In addition, BNY Mellon’s earnings-per-share increased by 17% over the same period a year ago, driven by a 5% increase in fee revenue, an 8% increase in net interest revenue, and bolstered by continued positive operating leverage.

The company also continued to be very shareholder-friendly during the quarter. 2Q2017 saw BNY Mellon return more than $700 million of capital to its shareholders through a combination of dividend payments and share repurchases.

BNY Bank of New York Mellon Second Quarter Financial Highlights

Source: Bank of New York Mellon Second Quarter Earnings Presentation, slide 5

At the security level, BNY Mellon trades like many other U.S. financial stocks – an average dividend yield and a lower-than-average valuation.

From a dividend perspective, BNY Mellon currently pays a quarterly dividend of $0.24 per share which yields 1.8% on the company’s current stock price of $52.10.

BNY Mellon’s yield is a tick below the average yield in the S&P 500; so while the stock won’t be a meaningful contributor to your portfolio’s overall net income, it shouldn’t detract much either.

BNY Mellon is expected to report adjusted earnings-per-share of $3.55 in fiscal 2017 and its stock currently trades at $52.10 for a price-to-earnings ratio of 14.7.

BNY Mellons’ valuation is lower than that of the broader stock market, but slightly above that of other similar financial companies. In any case, BNY Mellon appears to be reasonably priced today.

You can read more Sure Dividend analysis on the Bank of New York Mellon Corporation at the following link:

#12 – Delta Air Lines, Inc. (DAL)

Dividend Yield: 2.6%
Adjusted Price-to-Earnings Ratio: 8.7
Percent of Warren Buffett’s Portfolio: 1.8%
10 Year Total Return CAGR: 12.0%

Warren Buffett’s investment portfolio contains 53,110,395 shares of Delta Air Lines with a quarter-end market value of $2.9 billion.

Delta Air Lines is Buffett’s second-largest position in the airline industry, behind Southwest Airlines (the next stock on this list).

Delta is an internationally diversified airline operator with service to every major domestic and international travel destination.

Headquartered in Atlanta, Georgia, Atlanta was founded in 1924 and is the oldest United States airline to still be operating today.

The past decade has been one of significant transformation for Delta. Among other notable feats, Delta completed a significant restructuring; was relisted on the New York Stock Exchange; became the number one airline carrier in the New York City area; was added to the S&P 500; and paid down more than $8 billion of debt and more than $7.5 billion in cumulative dividend payments and share repurchases.

More details about Delta’s evolution over the last decade can be seen below.

DAL Delta's Evolution Over The Last Decade

Source: Delta Airlines Presentation at the Deutsche Bank Global Industrial and Materials Summit, slide 4

The past several years have seen Delta deliver consistently improving financial perforance. Take 2016, for example: Delta reported a record level of pre-tax profit, a record level of free cash flow, and paid more in share repurchases and dividend payments than ever before.

DAL Delta Airlines Consistently Producing Solid Results

Source: Delta Airlines Presentation at the Deutsche Bank Global Industrial and Materials Summit, slide 5

With that said, 2017 is expected to be a year of transition for this company.

Delta has capped its system capacity and will be investing heavily in its businesses to ensure that its long-term organic growth trajectory will remain intact. As a result, Delt’a operating margins will be dropping to the ~15% level before expanding to its target of 16%-18% in the following years.

DAL Delta Airlines 2017 Is A Transition Year

Source: Delta Airlines Presentation at the Deutsche Bank Global Industrial and Materials Summit, slide 6

In the meanwhile, there are plenty of reasons to appreciate this stock today.

This first is its dividend yield. Unlike some of its peers in the airline industry, Delta’s dividend yield is actually higher than the average dividend yield in the S&P 500.

More specifically, Delta currently pays a quarterly dividend of $0.305 per share which yields 2.6% on the company’s current stock price of $47.53.

What makes Delta’s dividend yield even more attractive is the company’s low trading multiple relative to its underlying earnings.

Delta is expected to report adjusted earnings-per-share of $5.45 in fiscal 2017 and its stock is currently trading at $47.53 for a price-to-earnings ratio of 8.7.

Delta’s high dividend yield, low price-to-earnings ratio, and investment from Warren Buffett are enough to catch the eye of even the most selective investors. You can read more Sure Dividend analysis on Delta Air Lines at the following link:

#11 – Southwest Airlines Co. (LUV)

Dividend Yield: 0.9%
Adjusted Price-to-Earnings Ratio: 13.6x
Percent of Warren Buffett’s Portfolio: 1.8%
10 Year Total Return CAGR: 14.0%

Berkshire Hathaway’s investment portfolio contains 47,659,456 shares of Southwest Airlines with a quarter-end market value of $3.0 billion at the time of the last 13F filing. At 1.8% of the portfolio, Southwest is Buffett’s largest holding in the airline industry.

Southwest Airlines ranks as the largest airline in the United States as measured by the annualized number of passengers flown. Southwest is known for being the largest low-cost airline carrier in the United States.

Founded in 1967, Southwest has a market capitalization of $33.9 billion and is headquartered in Dallas, Texas.

Like many of the other airlines in Warren Buffett’s investment portfolio, the past several years have been very kind to Southwest.

2016, in particular, was an outstanding year. Southwest Airlines achieved all-time records on a number of important financial metrics, including operating revenues, net income, free cash flow, and revenue passengers.

LUV Southwest Airlines 2016 An Outstanding Year

Source: Southwest Airlines August 2017 Investor Booklet

What stands out about Southwest Airlines relative to its peers is its unmatched profitability record.

While essentially every other major U.S. airline has declared bankruptcy at one time or another, Southwest is the outlier. This is a testament to the company’s conservatively managed business model, something that likely attractive Buffett and made him choose this airline as his number one holding in the sector.

LUV Southwest Unmatched Profitability Record

Source: Southwest Airlines August 2017 Investor Booklet, slide 4

Southwest Airlines is also an extremely profitable business, and has become increasingly profitable in recent years. The company’s progress in the return on invested capital metric can be seen below.

LUV Southwest Airlines Delivering Strong Returns On Investment

Source: Southwest Airlines August 2017 Investor Booklet, slide 7

Southwest Airlines currently pays a quarterly dividend of $0.125 per share which yields 0.9% on the company’s current stock price of $53.17.

This stock’s low yield makes it unappealing for dividend-focused investors, but the stock’s valuation and relative safety make it stand out nonetheless.

Southwest Airlines is expected to report adjusted earnings-per-share of $3.90 in fiscal 2017 and the stock currently trades at $53.17 for a price-to-earnings ratio of 13.6x.

From a valuation perspective, Southwest Airlines certainly trades at a premium to its peers in the airline industry.

However, the stock is still an outright bargain relative to the rest of the stock market and certainly merits potential investment at current prices.

You can read more Sure Dividend analysis on Southwest Airlines at the following link:

#10 – Moody’s Corporation (MCO)

Dividend Yield: 1.2%
Adjusted Price-to-Earnings Ratio: 23.7
Percent of Warren Buffett’s Portfolio: 1.9%
10 Year Total Return CAGR: 11.7%

Moody’s is a long-time Warren Buffett stock, and today he holds 24,669,778 shares of the Moody’s Corporation with a market value of $3.0 billion.

At 1.9% of Berkshire’s investment portfolio, Moody’s is Buffett’s largest stake with an allocation below 2% and rounds out a financials-heavy top 10 that also includes Wells Fargo, American Express, and U.S. Bancorp.

Moody’s Corporation is a risk-focused financial services firm that provides credit ratings, research, and risk analysis on debt and equity securities.

The firm is divided into two segments for reporting purposes:

  • Moody’s Investors Service: the well-known credit rating agency
  • Moody’s Analytics: the provider of research, analytics, and financial software

Details about the overall Moody’s enterprise and each of the company’s reporting segments can be seen below.

MCO Moody's Corporation Overview

Source: Moody’s Second Quarter Earnings Presentation, slide 6

Moody’s benefits form a highly diversified business model.

From a geographic perspective, only 58% of Moody’s revenue over the past twelve months has been generated in the United States, which shows the strength of this firm’s diversified business model.

Additionally, the company is very diversified by business type. Aside from Corporate Finance business, which contributed 33% to Moody’s revenue over the past twelve months, no other Moody’s business line was more than a 12% weighting in the company’s overall revenue mix.

And, about 50% of Moody’s revenue is recurring in nature.

MCO Moody's Corporation Revenue is Diversified

Source: Moody’s Second Quarter Earnings Presentation, slide 7

Moody’s financial performance in recent years has been fantastic.

While many large corporations are struggling to generate meaningful revenue growth, Moody’s has compounded its reveneue at 7% per year over the past 5 fiscal years. This has been complimented by excellent 13% growth in the company’s adjusted diluted earnings-per-share. Moody’s is expected adjusted earnings-per-share of $5.35-$5.50 in fiscal 2017, which will mark the firm’s eighth consecutive year of adjusted earnings-per-share growth.

MCO Moody's Corporation Financial Performance

Source: Moody’s Second Quarter Earnings Presentation, slide 8

Moody’s currently pays a quarterly dividend of $0.38 per share which yields 1.2% on the company’s current stock price of $130.49.

Moody’s yield is below the average dividend yield in the S&P 500 index, but the company may still make an attractive investment given its demonstrated ability to deliver excellent revenue and earnings growth.

And, the company’s valuation is reasonable at current prices.

Analysts expect Moody’s to report adjusted earnings-per-share of $5.50 (the top of the company’s guidance band) in fiscal 2017, and the company’s stock currently trades at $130.49 for a price-to-earnings ratio of 23.7.

This is significantly higher than many of the other company’s in Warren Buffett’s investment portfolio, but it is still below the average dividend yield within the S&P 500 Index. Importantly, Moody’s has has earned its current valuation thanks to many years of impressive revenue and earnings growth.

You can read more Sure Dividend analysis on Moody’s Corporation at the following link:

#9 – Charter Communications, Inc. (CHTR)

Dividend Yield: N/A (Charter Communications does not currently pay a quarterly dividend)
Adjusted Price-to-Earnings Ratio: 24.7
Percent of Warren Buffett’s Portfolio: 2.0%
10 Year Total Return CAGR: N/A (Charter’s long-term total returns are not meaningful because of a significant merger in 2016 and bankruptcy reorganization in 2009)

Warren Buffett’s investment portfolio contains 9,443,491 shares of Charter Communications with a market value of $3.2 billion. Charter Communications has an allocation of 2.0% in Buffett’s portfolio, making it his largest telecommunications stake (by far).

Charter Communications was founded in 1993 and executed its initial public offering in 1999 – just three years later. In 2009, the company completed a significant Chapter 11 bankruptcy reorganization and has been turning around its business ever since.

Today, Charter Communications is the second-largest provider of cable television in the United States, serving more than 17 million video subscribers over 41 states. Headquartered in Stamford, Connecticut, Charter Communications has a market capitalization of $99.1 billion.

Charter Communications’ recent financial performance has reflected broad-based growth in its underlying businesses.

In the most recent quarter, Charter Communications’ revenue increased 3.9% from the same period a year ago, and adjusted EBITDA increased 8.6%. This was caused by improvements in a number of important, industry-specific operating metrics, including 4.5% growth in total customer relationships, 3.8% growth in residential revenue, and 9.5% growth in commercial revenue.

CHTR Charter Communications Second Quarter Overview

Source: Charter Communications Second Quarter Earnings Presentation, slide 3

Charter Communications also continues to reinvest heavily into its businesses.

The second quarter of 2017 saw Charter Communications record $2.1 billion in capital expenditures, a minor $73 million increase from the same period a year ago.

Importantly, Charter Communications has recorded at least $1.5 billion in capital expenditures in each of the last five quarters, showing its willingness to play the long game in the ever-competitive telecommunications industry.

CHTR Charter Communications Capital Investment

Source: Charter Communications Second Quarter Earnings Presentation, slide 10

Charter Communications’ 2009 bankruptcy reorganization and the company’s subpar financial performance since that transformative restructuring has had an unintended benefit for Charter’s shareholders.

The company is carrying a significant amount of tax loss carryforwards, which means that while the company will incur taxes, it will not have to pay taxes because these new taxes will be applied to the company’s existing ~$11 billion of loss carryforwards.

The net effect of this unique accounting treatment is to increase the company’s cash flow for the same level of net income, which allows Charter to be more aggressive in its capital allocation.

CHTR Charter Communications Significant Tax Assets Support Cash Flow Growth

Source: Charter Communications Second Quarter Earnings Presentation, slide 13

Charter does not pay a dividend, which removes it from the investment universe of many Sure Dividend readers.

However, at an attractive enough valuation, the stock could still merit investment from buy-and-hold investors.

Charter Communications reported adjusted earnings-per-share of $15.94 in fiscal 2016 and the company’s stock is currently trading at $392.97 for a price-to-earnings ratio of 24.7.

While Charter Communications is not a screaming bargain, its valuation is roughly in-line with the broader valuation of the S&P 500 Index. Dividend growth investors should likely look elsewhere unless the company’s valuation changes significantly.

#8 – U.S. Bancorp (USB)

Dividend Yield: 2.2%
Adjusted Price-to-Earnings Ratio: 15.2
Percent of Warren Buffett’s Portfolio: 2.7%
10 Year Total Return CAGR: 7.3%

Berkshire Hathaway’s investment portfolio contains 85,063,167 shares of U.S. Bancorp with a market value of $4.4 billion, or 2.7% of the overall investment portfolio. U.S. Bancorp is also Buffett’s third-largest position in the financial sector, behind American Express and Wells Fargo.

U.S. Bancorp is the parent company of the U.S. Bank National Association, which does business as U.S. Bank NA. U.S. Bancorp operates more than 3,100 retail finance locations across 25 states.

Founded in 1863, U.S. Bancorp is headquartered in Minneapolis, Minnesota and has a market capitalization of $89.5 billion.

U.S. Bancorp has a significant scale-based competitive advantage in the highly-fragmented U.S. financial services industry. The company’s asset base is impressive:

  • $450 billion in total assets
  • $337 billion in total deposits
  • $274 billion in total loans

The company also has a reasonable amount of geographic diversification, with operations that are diversified both regionally, nationally, and internationally, as shown in the following diagram.

USB US Bancorp Advantaged Position

Source: US Bancorp Presentation at the 2017 Barclays Americas Select Franchise Conference, slide 4

U.S. Bancorp’s size stacks up well relative to the other giants in the U.S. financial services industry.

The institution is the fifth largest based on the three major metrics used to gauge American financial institutions: assets, deposits, and market value.

U.S. Bancorp’s full ranking relative to its peers can be seen below.

USB US Bancorp Advantaged Position - Size

Source: US Bancorp Presentation at the 2017 Barclays Americas Select Franchise Conference, slide 5

U.S. Bancorp is certainly not the largest U.S. financial institution, but where the firm truly stands out is in its profitability.

U.S. Bancorp is the undisputed leader in generating profits from its business. This is true relative to average assets, average common equity, as well as the all-important efficiency ratio.

U.S. Bancorp is compared to its peer group on three major profitability metrics in the following diagram.

USB US Bancorp Advantaged Position - Profitability

Source: US Bancorp Presentation at the 2017 Barclays Americas Select Franchise Conference, slide 6

The company’s recent financial performance has been strong.

While U.S. Bancorp’s diluted earnings-per-share increased by only 2.4% when compared to the same period a year ago, the company’s average total loans and average total deposits increased by 3.4% and 7.7%.

Importantly, nonerforming assets decreased by 19.3% year-on-year and the company’s net charge-off ratio remained relatively constant, wavering by just a single basis point.

USB US Bancorp 2Q2017 Highlights

Source: U.S Bancorp Second Quarter Earnings Presentation, slide 3

All said, we believe that U.S. Bancorp is well-positioned to continue its streak of impressive profitability for the foreseeable future.

The company’s dividend yield and valuation are two other reasons why this security appeals to the conservative, buy-and-hold investor.

U.S. Bancorp currently pays a quarterly dividend of $0.28 per share which yields 2.2% on the company’s current stock price of $51.68.

U.S. Bancorp is expected to report adjusted earnings-per-share of $3.40 in fiscal 2017 and the company’s stock currently trades at $51.68 for a price-to-earnings ratio of 15.2.

U.S. Bancorp’s above-average dividend yield and reasonable price-to-earnings ratio makes this stock an appealing opportunity for dividend growth investors. You can read more Sure Dividend analysis on U.S. Bancorp at the following link:

#7 – Phillips 66 (PSX)

Dividend Yield: 3.4%
Adjusted Price-to-Earnings Ratio: 17.4
Percent of Warren Buffett’s Portfolio: 4.1%
10 Year Total Return CAGR: N/A (Phillips 66 was spun-off from ConocoPhillips in 2012)

Phillips 66 is Buffett’s largest energy position. Berkshire Hathaway owns 80,689,892 shares of Phillips 66 with a market value of $6.7 billion, equivalent to 4.1% of the total portfolio at the time of the last 13F filing.

Phillips 66 is a downstream and midstream energy corporation that was spun-off from ConocoPhillips in April of 2012.

With a market capitalization of approximately $44 billion, Phillips 66 operates in four main segments:

  • Refining
  • Marketing & Specialties
  • Midstream
  • Chemicals

Phillips 66’s recent financial performance has reflected improvements in oil prices, and more importantly, crack spreads. The company is also highly shareholder-friendly and distributed $741 million its stockholders in the most recent quarter alone.

PSX Phillips 66 Overview

Source: Phillips 66 Second Quarter Earnings Presentation, slide 4

Importantly, Phillips 66 is operating cash flow positive during one of the toughest energy environments in recent history.

Between the company’s cash from operations and working capital, Phillips 66’s positive cash flow means that the company’s cash balance is actually growing, quarter after quarter.

PSX Phillips 66 Cash Flow

Source: Phillips 66 Second Quarter Earnings Presentation, slide 12

This allows Phillips 66 to continue funding its generous dividend payment.

Phillips 66 currently pays a quarterly dividend of $0.70 per share which yields 3.4% on the company’s current stock price of $81.56.

Phillips 66’s dividend yield is significantly higher than the ~2% average dividend yield in the S&P 500, giving the stock appeal for yield-hungry investors.

Phillips 66 is expected to report adjusted earnings-per-share of $4.70 in fiscal 2017 and the company’s stock is currently trading at $81.56 for a forward price-to-earnings ratio of 17.4x.

Phillips 66 appears reasonably valued at current prices, and Warren Buffett’s significant investment means that dividend growth investors ought to consider researching this stock further.

You can read more Sure Dividend analysis on Phillips 66 at the following links:

#6 – International Business Machines Corporation (IBM)

Dividend Yield: 4.3%
Adjusted Price-to-Earnings Ratio: 11.7
Percent of Warren Buffett’s Portfolio: 5.3%
10 Year Total Return CAGR: 4.8%

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, 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.

IBM International Business Machines Corporation Key Financial Metrics

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.

IBM International Business Machines Corporation A Cognitive Solutions & Cloud Platform Company

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.

IBM International Business Machines Corporation Cash Flow and Balance Sheet Highlights

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.

You can read more Sure Dividend analysis on International Business Machines Corporation at the following links:

#5 – American Express Company (AXP)

Dividend Yield: 1.5%
Adjusted Price-to-Earnings Ratio: 14.8
Percent of Warren Buffett’s Portfolio: 7.9%
10 Year Total Return CAGR: 5.6%

Berkshire Hathaway’s investment portfolio holds 151,610,700 shares of the American Express Company with a quarter-end market value of $12.7 billion. Buffett’s American Express stake constitutes 7.9% of his overall investment portfolio.

The story behind Warren Buffett’s investment in American Express is a legendary example of opportunistic value investing.

Back in the 1960s, American Express was extending loans to a salad oil company called Allied Crude Vegetable Oil.

Allied Crude found that it could obtain loans from American Express based on its inventory of salad oil barrels.

Knowing that water is denser than salad oil and that salad oil would float on water, company workers filled the barrels mostly full of water to fraudulently bolster their inventory and qualify for larger inventory-secured loans.

Eventually, the Allied Crude scandal was uncovered and American Express suffered losses as one of the company’s creditors. American Express’ stock was punished and Warren Buffett was able to accumulate shares on the cheap.

The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” – Warren Buffett

Fortunately for Buffett, Berkshire, and Berkshire’s investors, the Oracle of Omaha recognized that American Express was far from being ‘on the operating table’. Today, Buffett’s American Express investment is worth significantly more than its carrying value on Berkshire’s books.

The current American Express is a far different enterprise than the one that Buffett invested in all those years ago.

With a market capitalization of $76 billion, American Express is a diversified financial services company that is best known for its name-brand American Express credit cards.

The company’s financial performance in recent years has been driven by its shareholder-friendly capital allocation. While the company’s business is growing at a rather slow pace (revenues net of interest expense grew just 1% year-on-year in the most recent quarter), American Express managed to reduce its share count by 5%, which is a significant tailwind to per-share investor returns.

AXP Q2 2017 Summary Financial Performance

Source: American Express Second Quarter Earnings Presentation, slide 3

In the above diagram, you’ll notice that American Express’ diluted earnings-per-share declined 30% year-on-year last quarter.

The main reason for this is a significantly higher expense count. In the quarter, expenses rose 21%, which is – on the surface – an unacceptable rate of expense growth for a mature corporation.

AXP Expense Performance

Source: American Express Second Quarter Earnings Presentation, slide 14

However, much of this gain in expenses is due to internal investments in new technology, and certain accounting charges incurred as part of ending American Express’ Costco partnership. Accordingly, the company’s long-term expense trajectory should not remain elevated; instead, these investments show American Express’ willingness to plan for the long-term in the highly competitive U.S. financial services industry.

American Express is one of the most shareholder-friendly companies in our investment universe.

The company consistently returns nearly all of its free cash flow to its shareholders through a combination of share repurchases and dividend payments. These capital allocation decisions will significantly boost long-term shareholders returns, particularly if their pace is maintained for any long period of time.

AXP Capital And Payout Ratios

Source: American Express Second Quarter Earnings Presentation, slide 16

American Express currently pays a quarterly dividend of $0.32 per share which yields 1.5% on the company’s current stock price of $85.38.

While American Express’ yield does not immediately appeal to dividend investors, the company’s valuation partially makes up for its lack of significant income generation capabilities.

American Express is expecting 2017 earnings-per-share to fall in the range of $5.75 in fiscal 2017 and the company’s stock is currently trading at $85.38 for a price-to-earnings ratio of 14.8. American Express current valuation is significantly lower than the average valuation in the S&P 500 Index, which makes the stock appealing for value-focused investors.

You can read more Sure Dividend analysis on American Express at the following link:

#4 – The Coca-Cola Company (KO)

Dividend Yield: 3.2%
Adjusted Price-to-Earnings Ratio: 24.7
Percent of Warren Buffett’s Portfolio: 11.1%
10 Year Total Return CAGR: 8.5%

The Coca-Cola Company 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.

KO Coca-Cola We Are The World's Leading Nonalcoholic Beverage Company

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.

KO Coca-Cola We Compete In An Attractive Industry

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.

KO Coca-Cola Refranchising Will Drive Local Market Performance

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.

You can read more Sure Dividend analysis on Coca-Cola at the following link:

#3 – Apple Inc. (AAPL)

Dividend Yield: 1.6%
Adjusted Price-to-Earnings Ratio: 17.3
Percent of Warren Buffett’s Portfolio: 11.6%
10 Year Total Return CAGR: 25.9%

Apple 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.

AAPL Apple Return of Capital and Cash Position

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.

You can read more Sure Dividend analysis on Apple Inc. at the following links:

#2 – Wells Fargo & Company (WFC)

Dividend Yield: 3.0%
Adjusted Price-to-Earnings Ratio: 12.3
Percent of Warren Buffett’s Portfolio: 16.0%
10 Year Total Return CAGR: 6.1%

Warren Buffett’s investment portfolio holds 467,987,270 shares of Wells Fargo & Company with a quarter-end market value of $25.9 billion. It is the second largest position in his stock portfolio.

Wells Fargo is one of the largest financial institutions in the United States with a market capitalization of $264 billion. The company operates more than 8,700 retail bank branches and 12,500 ATMs, with offices in more than 36 countries.

Wells Fargo is a long-time Warren Buffett holding and it’s not hard to see why. The company has a number of characteristics that make it a quantitatively more conservative investment than many of the other large U.S. banks.

One of the more notable Wells Fargo financial traits is the company’s low level of earnings volatility relative to its peers. The company’s reported earnings and return on equity tend to be much more stable over time than many of the members of its peer group.

WFC Wells Fargo History of Steady Earnings And Low Volatility

Source: Wells Fargo 2017 Investor Day Financial Presentation, slide 2

Despite Wells Fargo’s conservative business model, it is one of the fastest growing member of its peer group when measuring the important measure of book value per common share.

Over the past four fiscal years, Wells Fargo has compounded its book value per common share at a rate of 7% per year, which is higher than each member of its peer group aside from U.S. Bancorp (another important Warren Buffett financial holding).

WFC Wells Fargo Growth in Book Value vs. Peers

Source: Wells Fargo 2017 Investor Day Financial Presentation, slide 3

Wells Fargo’s recent financial performance has been similarly strong.

The company’s second quarter reported net income of $5.8 billion and diluted earnings per common share of $1.07, which represents growth from the prior year’s quarter of 4.5% and 5.9%, respectively.

Details about Wells Fargo’s performance in its most recent quarter can be seen below.

WFC Wells Fargo 2Q17 Highlights

Source: Wells Fargo Second Quarter Earnings Presentation, slide 2

Wells Fargo’s improved financial performance in the most recent quarter was driven by fundamental growth in a number of important banking-specific financial metrics, including loans, eposits, and net interest income.

Share repurchases also played a role, as Wells Fargo reported a noticeable decrease in its period-end common shares outstanding.

WFC Wells Fargo Year-Over-Year Results

Source: Wells Fargo Second Quarter Earnings Presentation, slide 3

Wells Fargo’s security has a number of quantitative characteristics that should appeal to buy-and-hold dividend growth investors.

First and foremost is the company’s above-average dividend yield. Wells Fargo currently pays a quarterly dividend of $0.39 which yields 3.0% on the company’s current stock price of $51.68. Wells Fargo’s current dividend yield is significantly higher than the average dividend yield in the S&P 500.

The second trait is WElls Fargo’s appealing valuation.

Wells Fargo is expected to report adjusted earnings-per-share of $4.20 in fiscal 2017 and the company’s stock currentluy trades at $51.68 for a price-to-earnings ratio of 12.3x.

Wells is currently trading at a valuation approximately half as high as the S&P 500. Value investors, take notice.

You can read more Sure Dividend analysis on Wells Fargo & Company at the following link:

#1 – The Kraft Heinz Company (KHC)

Dividend Yield:
Adjusted Price-to-Earnings Ratio:
Percent of Warren Buffett’s Portfolio: 17.2%
10 Year Total Return CAGR: N/A

Berkshire Hathaway’s investment portfolio owns 325,634,818 shares of The Kraft Heinz Company with a market value of $27.9 billion at the time of the last 13F filing.

Composing 17.2% of Buffett’s investment portfolio, Kraft Heinz is Berkshire’s largest single stock position.

Kraft Heinz is the fifth-largest food & beverage company in the world. The company was formed on July 2, 2015 thanks to the merger between Kraft Foods Group and H.J. Heinz Holding Corporation.

Before the merger, Heinz was privately owned by Berkshire Hathaway and 3G Capital. Kraft (KRFT) was publicly-traded, and Kraft shareholders received one share of KHC along with $16.50 in cash for every share of KRFT they owned prior to the transaction.

This merger brought many of the world’s most famous food brands together under the same corporate roof.

Aside from the flagship Kraft and Heinz names, Kraft Heinz owns iconic brands like ABC, Capri Sun, Classico, Hell-O, Kool-Aid, Lunchables, and many others. Altogether, Kraft owns 200+ brands sold in nearly 200 countries, and 8 brands with $1 billion+ in annual sales.

Since the transformative transaction that created Kraft Heinz, the company has realized some pretty remarkable financial performance. In 2015 – the first fiscal year after the merger – Kraft Heinz reported adjusted earnings-per-share of $2.19. In 2017, Kraft Heiz is expected to report adjusted earnings-per-share of $3.60, an increase of approximately 65% in just two years.

In 2015 – the first fiscal year after the merger – Kraft Heinz reported adjusted earnings-per-share of $2.19. In 2017, Kraft Heiz is expected to report adjusted earnings-per-share of $3.60, an increase of approximately 65% in just two years.

Given this projected growth reates, it is unsurprising that Kraft Heinz’s recent financial performance has been very strong. The company’s second quarter reported 15.3% growth in adjusted earnings-per-share and for the first half of the year, a very similar 15.2% rate of growth in adjusted earnings-per-share was realized.

KHC Kraft Heinz Q2 And First Half Financial Summary

Source: Kraft Heinz Second Quarter Earnings Presentation, slide 3

There are two main factors that have driven Kraft Heinz’s robust financial performance since its merger.

The first is cost savings. The pre-merger Kraft and Heinz businesses had virtually identical business models, which means that there was significant opportunity to eliminate duplicate expenses and improve the overall efficiency of the combined business.

Since the merger, Kraft Heinz has achieved $1.45 billion in cumulative savings – a significant sum by any measure.

The second factor is debt repayment. The terms of the merger meant that the pro-forma Kraft Heinz business would be highly leveraged, and one of the main priorities of the company was to de-lever its business once the merger was completed.

Indeed, in the second quarter alone, Kraft Heinz repaid $2 billion of its outstanding debt.

KHC Kraft Heinz 2017 Mid-Year Update

Source: Kraft Heinz Second Quarter Earnings Presentation, slide 2

Looking ahead, Kraft Heinz’ business is expected to continue performing well. Analysts expect the company’s adjusted earnings-per-share to nearly double over the next 5 years, driven by continued cost savings initiative and organic growth.

Specific details about Kraft Heinz’s outlook can be seen below.

KHC Kraft Heinz Outlook

Source: Kraft Heinz Second Quarter Earnings Presentation, slide 9

Kraft Heinz recently increased its quarterly dividend payment to $0.625 per share, equivalent to an annual payout of $2.50. The company’s new dividend yields 3.0% on its current stock price of $84.49. Kraft Heinz’s above-average dividend yield makes the stock appealing for yield-hungry investors.

Kraft Heinz is expected to report adjusted earnings-per-share of $3.60 in fiscal 2017 and the company’s stock currently trades at $84.49 for a price-to-earnings ratio of 23.5.

Kraft Heinz’s valuation is slightly below the average valuation in the S&P 500. For investors that don’t mind paying up for a high-quality business, Kraft Heinz might be the opportunity you’re looking for. After all, the company Warren Buffett’s vote of confidence (which, in this case, comes with a nearly $30 billion price tag).

You can read more Sure Dividend analysis on the Kraft Heinz Company at the following link:

Final Thoughts

Warren Buffett’s investment portfolio contains many of the strongest, most long-lived businesses around. You can see more high-quality dividend stocks in the following Sure Dividend databases:

Alternatively, another great place to look for high-quality business is inside the portfolios of other highly successful investors.

To that end, Sure Dividend has created the following stock databases

You might also be looking to create a highly customized dividend income stream to pay for life’s expenses.

The following two lists provide useful information on high dividend stocks and stocks that pay monthly dividends:

Article by Sure Dividend