I think you’ll agree with me that high dividend stocks can be excellent investments for those looking for both:
- Current income
- Bond-beating total returns
But it can be difficult to find high quality, high dividend stocks.
It isn’t much good finding high yielding stocks when they cut their dividends shortly thereafter.
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, high dividend stocks for your portfolio. That’s because Buffett (and other institutional investors) are required to periodically show their holdings in a ’13F Filing’. On November 14th, 2016, Buffett released his latest 13F Filing.
This article analyzes Warren Buffett’s top 20 high dividend stocks based on yield from his latest 13F filing.
Table of Contents
You can skip to analysis of any of Warren Buffett’s 20 high dividend stocks with the table of contents below. Stocks are listed in order from lowest yield to highest yield.
- Mondelez (MDLZ): 1.8% dividend yield
- American Express (AXP): 1.8% dividend yield
- M&T Bank Corporation (MTB): 2.0% dividend yield
- Apple (AAPL): 2.1% dividend yield
- U.S. Bancorp (USB): 2.3% dividend yield
- Kinder Morgan (KMI): 2.3% dividend yield
- Deere & Company (DE): 2.6% dividend yield
- United Parcel Service (UPS): 2.7% dividend yield
- Johnson & Johnson (JNJ): 2.8% dividend yield
- Wells Fargo & Company (WFC): 2.9% dividend yield
- The Kraft Heinz Company (KHC): 2.9% dividend yield
- Wal-Mart (WMT): 2.9% dividend yield
- General Electric (GE): 3.0% dividend yield
- Phillips 66 (PSX): 3.0% dividend yield
- Procter & Gamble (PG): 3.3% dividend yield
- Coca-Cola (KO): 3.4% dividend yield
- IBM (IBM): 3.5% dividend yield
- Sanofi (SNY): 4.2% dividend yield
- General Motors (GM): 4.6% dividend yield
- Verizon (VZ): 4.8% dividend yield
Warren Buffett & Dividend Stocks
Buffett has grown his wealth by investing in and acquiring business with strong competitive advantages trading at fair or better prices.
Most investors know Warren Buffett looks for quality, but few know the degree to which he invests in dividend stocks.
- 92% of Warren Buffett’s portfolio is invested in dividend stocks
- His top 4 holdings have an average dividend yield of 3.2% (and make up 63% 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.
It happens that dividend stocks with long histories of dividend increases match what Warren Buffett looks for in a stock investment.
This article examines Warren Buffett’s top 20 high dividend.
#20 – Mondelez (MDLZ)
Dividend Yield: 1.8%
Price-to-Earnings Ratio: 20.3 (forward P/E used)
Years of Steady or Rising Dividends: 45 (including pre-spinoff history)
Percent of Warren Buffett’s Portfolio: 0.0% (very small amount)
10 Year Earnings-Per-Share Growth Rate: N/A (due to spin-off)
Mondelez is the largest confectioner in the world based on its market cap of $67 billion. The company owns a portfolio of well-known brands. Mondelez’ 8 brands that generate more than $1 billion a year in sales are shown in the image below.
Source: Mondelez Investor Relations
Mondelez recently attempted to acquire Hershey’s (HSY). The acquisition fell through, however. Mondelez will have to settle for ‘just’ 8 billion dollar brands for now…
The company will likely pursue smaller bolt-on acquisitions instead.
Mondelez operates in one of the slowest changing industries around. Sweet snacks will likely never go out of style. Moreover, sugar and chocolate can be addicting. This is similar in some ways to Philip Morris (PM) and Altria (MO), Mondelez parent companies [through Kraft (KRFT)].
Despite its stability, Mondelez shares are a hold – not a buy – at current prices. The stock looks a bit pricey currently. Indeed, Mondelez has been pricey since becoming a stand-alone business. The company’s average price-to-earnings ratio over a year hasn’t dipped below 20. If the company’s price-to-earnings ratio does decline below 20 (and preferably lower), it will become a more compelling investment.
The stock currently yields 1.8%; the lowest of Buffett’s 20 highest yielding dividend stocks. The stocks in this article are analyzed in order of yield, from lowest to highest.
#19 – American Express (AXP)
Dividend Yield: 1.8%
Price-to-Earnings Ratio: 12.9
Years of Steady or Rising Dividends: 39 years without a reduction
Percent of Warren Buffett’s Portfolio: 7.5%
10 Year Earnings-Per-Share Growth Rate: 4.0%
American Express is a large credit services business with a market cap of $67 billion. The company was founded in 1850 by Henry Wells, William Fargo, and John Warren Butterfield.
If the names Wells and Fargo sound familiar to you, they should. Henry Wells and William Fargo also founded Wells Fargo (WFC). Clearly, Buffett is a fan of Henry Wells and William Fargo’s businesses. Buffett has invested 24% of his portfolio in these two businesses.
American Express is a long-term Buffett hold…
He originally invested in American Express back in 1964. At the time, the company was going through a ‘salad oil scandal’. History is often stranger than fiction. The scandal created an excellent buying opportunity for Buffett. In fact, Buffett invested around 40% of his fund’s money into American Express to maximize his exposure to the mispricing.
Today, American Express is still reasonably cheap. The company trades for a price-to-earnings ratio of 12.9. The S&P 500 currently has a price-to-earnings ratio of around 25. American Express is trading for around half the valuation of the S&P 500.
The stock has a low payout ratio of just 21%. This makes additional dividend increases extremely likely, even if earnings don’t grow particularly quickly.
With that said, the company’s low payout ratio also gives it a relatively low dividend yield of 1.8%. For comparison, the S&P 500 has a dividend yield of 2.0%.
American Express makes a compelling purchase for value investors looking for stability and dividend growth. American Express’s 10 year historical average price-to-earnings ratio is 14. The company appears undervalued at current prices.
#18 – M&T Bank Corporation (MTB)
Dividend Yield: 2.0%
Price-to-Earnings Ratio: 19.2
Years of Steady or Rising Dividends: 25
Percent of Warren Buffett’s Portfolio: 0.5%
10 Year Book-Value-Per-Share Growth Rate: 5.7%
M&T Bank Corporation is a bank holding company with ~800 locations across the East Coast.
M&T Bank is one of the few banks that did not cut its dividend payments during the Great Recession of 2007 to 2009. M&T Bank Corporation has grown to become one of the 15 largest banks in the United States.
M&T Bank Corporation maintains higher than industry average returns-on-equity and returns-on assets.
Additionally, the company is highly regarded for its conservative nature. M&T Bank Corporation does not over extend itself by writing risky loans.
The company’s conservative nature has produced phenomenal results for long-term shareholders.
The company has produced 18.9% annualized total returns for shareholders since 1980, one of the highest of any stocks during that time period.
Rising interest rates are a catalyst for M&T Bank Corporation. Rising rates favor the company as they lead to a greater spread on interest earned from deposits versus interest paid.
Shares of M&T Bank Corporation currently trade for a price-to-earnings ratio of 19.2. The company appears to be either trading around fair value or somewhat overvalued at current prices.
M&T Bank Corporation’s future looks reasonably bright. The company’s stock has surged around 20% over the last month, pushing up the stock’s valuation.
M&T Bank Corporation has a dividend yield of 2.0%, which is around average for an S&P 500 stock. The company is a solid long-term hold for investors looking for exposure to the banking sector.
#17 – Apple (AAPL)
Dividend Yield: 2.1%
Price-to-Earnings Ratio: 13.5
Years of Steady or Rising Dividends: 5
Percent of Warren Buffett’s Portfolio: 1.3%
10 Year Earnings-Per-Share Growth Rate: 45.3%
Apple is the largest corporation in the world based on both earnings ($46 billion in the last 12 months) and market cap ($595 billion).
Readers are likely very familiar with the company’s in demand (and expensive) consumer tech products and platforms, including:
- iPhone
- iPad
- iPod
- iTunes
- Apple Watch
Apple is currently trading for a price-to-earnings ratio of 13.5. This is far too cheap for the world’s most profitable business.
Apple’s share price is depressed because earnings-per-share growth has stalled. It was a mathematical impossibility the company would manage to keep up its insane growth rate. Now that growth has stalled, growth oriented investors are selling the stock.
Value oriented investors are picking up shares of Apple at bargain prices. Warren Buffett has joined in on the party – Apple is his most recent stock purchase. The Oracle of Omaha has invested around $1 billion in the Palo Alto based juggernaut.
Apple will not be able to generate eye-popping growth numbers going forward. With such a low share price, management is creating shareholder vale through share buybacks. Apple decreased its share count by 4.9% in 2015, and will very likely continue to gobble up undervalued shares.
Additionally, the company pays out a decent 2.1% dividend. Apple currently has a payout ratio of just 25%.
I expect the company’s payout ratio to grow (and dividends to increase significantly) as Apple transitions from a growth stock to the world’s largest blue chip tech-based consumer goods company.
#16 – U.S. Bancorp (USB)
Dividend Yield: 2.3%
Price-to-Earnings Ratio: 15.3
Years of Steady or Rising Dividends: 7
Percent of Warren Buffett’s Portfolio: 2.8%
10 Year Book-Value-Per-Share Growth Rate: 8.3%
It is easy to see why Warren Buffett has invested billions of Berkshire Hathaway’s portfolio into U.S. Bancorp stock.
U.S. Bancorp is the banking industry leader in return on assets, return on equity, and efficiency ratio.
Note: The financial metric ‘efficiency ratio’ is calculated as expenses before interest expense divided by total revenue.
The image below shows U.S. Bancorp’s industry leading status in these important metrics for fiscal 2015.
U.S. Bancorp is more than highly profitable. It is also very shareholder friendly. The company targets a dividend payout ratio of 30% to 40% a year and also targets spending 30% to 40% of earnings on share repurchases each and every year.
At current price levels, this comes to a shareholder yield of around 5%. The company has also managed to grow assets at about 7.5% a year over the last decade. With a shareholder yield of ~5% and a 7.5% growth rate, investors can expect total returns of around 12.5% a year from U.S. Bancorp.
U.S. Bancorp currently trades at a price-to-earnings ratio of just 15.3. Banks have traditionally traded at price-to-earnings ratios below those of the overall market due to risk of bank failure and strong competition.
U.S. Bancorp has found a way to be more profitable than its peers. In addition, the company remained profitable throughout the Great Recession of 2007 to 2009 – though it did cut its dividend significantly during that period. At its current price-to-earnings ratio, U.S. Bancorp appears to be somewhat undervalued.
The company makes a compelling choice for investors looking for exposure to the United States banking industry.
#15 – Kinder Morgan (KMI)
Dividend Yield: 2.3%
Price-to-Earnings Ratio: 29.5 (forward price-to-earnings ratio)
Years of Steady or Rising Dividends: 0
Percent of Warren Buffett’s Portfolio: 0.4%
10 Year Earnings-Per-Share Growth Rate: N/A
Kinder Morgan is one of Warren Buffett’s more recent investments. The company’s stock price declined significantly when it announced a 75% dividend cut.
Kinder Morgan’s management said it was ‘run by shareholders, for shareholders’. The dividend cut hurt many long-term shareholders who counted on the stock for dividend income. Here is an excerpt from an article on Sure Dividend covering Kinder Morgan.
The massive sell-off in Kinder Morgan stock has created an interesting opportunity. The company’s shares are likely undervalued today. Value investors may want to dig deeper into the prospects of the company.
What is very clear at this point is that Kinder Morgan is not a shareholder friendly company. Investors should no longer trust in management to act in their best interest. As a result, Kinder Morgan stock does not possess the qualities I would look for in a long-term investment.
Warren Buffett is likely investing in Kinder Morgan now to pick up high quality assets at a discount. Kinder Morgan’s dividend cut makes the company a poor choice for investors looking for rising dividend income (especially seeing how management gave no warning of a cut).
Kinder Morgan controls over 80,000 miles of pipelines and 180 terminals. The company is the largest transporter of petroleum and natural gas in the United States.
The company does, however make an interesting value investment. The stock traded as high as $40 per share. It is currently trading for $22 per share.
Buffett’s investment in Kinder Morgan is likely a value play. This one time dividend investor favorite stock has a favorable risk/reward profile at current prices – although much of the pessimism has already lifted; Kinder Morgan stock has returned nearly 50% this year to date.
#14 – Deere & Company (DE)
Dividend Yield: 2.6%
Price-to-Earnings Ratio: 20.8
Years of Steady or Rising Dividends: 27
Percent of Warren Buffett’s Portfolio: 1.4%
10 Year Earnings-Per-Share Growth Rate: 6.5%
Deere & Company is the world’s largest farming equipment manufacturer. The company’s operations are global. It has a large market share in:
- United States
- Brazil
- Russia
- India
- China
- Europe
Deere & Company is realizing a temporary downturn in its business. The company is cyclical and deponent on grain prices. Farmers hold off on large capital investments when their cash flows diminish due to low grain prices.
Deere & Company expects revenue to decline 10% in 2016 and earnings (before share repurchases) to decline around 7% on the year.
Despite weakness in the industry, Deere & Company remains a safe long-term investment. The company pays out about $800 million a year in dividends. Even during industry lows, the company expects to make around $1.3 billion in profits in 2016 for a dividend payout ratio of 62%.
Deere & Company has paid steady or increasing dividends for 27 years. There is a reason Warren Buffett has invested in the company…
It has a strong competitive advantage.
Deere & Company’s competitive advantage comes from its brand recognition and reputation for quality. Deere & Company’s competitive advantage has given it a 60% market share of the farming equipment industry in the US and Canada.
Deere & Company has averaged earnings-per-share growth of 12.8% a year from earnings lows in 2009 to earnings lows in fiscal 2015. Peak-to-peak (2008 to 2013) earnings-per-share grew at 14.1% a year for the company.
When the agricultural industry grows, Deere & Company will see its earnings surge. I expect the company to continue to deliver 10%+ EPS growth over full economic cycles.
This growth combined with the company’s current ~2.5% dividend yield gives Deere & Company investors expected total returns of 12.5+%.
#13 – United Parcel Service (UPS)
Dividend Yield: 2.7%
Price-to-Earnings Ratio: 20.8
Years of Steady or Rising Dividends: 33
Percent of Warren Buffett’s Portfolio: 0.0% (very small amount of ownership)
10 Year Earnings-Per-Share Growth Rate: 3.6%
United Parcel Service is the largest publicly traded freight and delivery company in the world. The company was founded in Seattle in 1907. Today UPS has market cap of $100 billion. For comparison, FedEx (FDX) has market cap of $50 billion.
United Parcel Services is a global business with ~2,000 operating facilities and ~100,000 vehicles in its fleet.
The larger a delivery network gets, the stronger its competitive advantage becomes. Having such a large operation results in lower prices. UPS is the largest freight company. The company has a strong competitive advantage that will only get stronger as it continues to grow.
The mail industry in the U.S. is an oligopoly largely dominated by just 3 players:
- Fed Ex (FDX)
- United Parcel Service
- United States Post Office
Of the three, only the two publicly traded companies are profitable. The United States Post Office expects losses of $2 billion a year going forward (your tax dollars hard at work?). UPS and Fed Ex combined make around $6 billion a year, for comparison.
Online retail will continue to drive growth for United Parcel Service going forward. The company will benefit from increased package shipments due to online purchases. Online retail is expected to grow about 4x as fast as global GDP over the next several years. The image below from UPS’ investor presentation shows this growth:
The company has more tailwinds besides e-commerce growth. United Parcel Service is also benefiting from growth in emerging markets.
The company has focused on expanding its international reach over the last 20 years. UPS stands to gain from increased shipments between countries as global commerce grows. In total, the company is expecting 6% to 12% earnings-per-share growth going forward
United Parcel Service is a shareholder friendly business. The company has several decades of rising dividends. Also, the company has reduced its share count by an average of 2% a year over the last decade.
United Parcel Service is a low-risk business in a fairly slow-changing industry. The company’s historical price-to-earnings ratio is around 18.3. UPS is likely trading around fair value (or a bit above) at current prices.
#12 – Johnson & Johnson (JNJ)
Dividend Yield: 2.8%
Price-to-Earnings Ratio: 20.0
Years of Steady or Rising Dividends: 54
Percent of Warren Buffett’s Portfolio: 0.0% (very small amount of ownership)
10 Year Earnings-Per-Share Growth Rate: 5.5%
The image below shows the 10 year cumulative returns of Johnson & Johnson (JNJ) and the S&P 500 (SPY):
Source: Data from Yahoo! Finance
$1.00 invested in Johnson & Johnson on 1/27/2006 is worth $2.33 versus $1.82 (through 1/26/16) for the same investment in SPY (both include reinvested dividends).
What’s even more impressive about the company’s performance over the last decade is its standard deviation.
The company is an exceptionally low risk investment. Compare Johnson & Johnson’s stock price standard deviation to that of the S&P 500’s over the last 10 years:
- S&P 500 standard deviation of 20.7%
- Johnson & Johnson standard deviation of 16.3%
Johnson & Johnson is not new to success. The company has paid increasing dividends for 53 consecutive years.
A company cannot grow its dividends for 5 decades without a strong and durable competitive advantage.
Johnson & Johnson’s has 3 broad competitive advantages that differentiate it from its competitors:
- Size/scale competitive advantage
- Research & development competitive advantage
- Brand competitive advantage
Johnson & Johnson’s size/scale competitive advantage is a result of it being the largest player in the health care industry. The company’s long history gives it excellent connections with suppliers and governments around the world. The company can keep input costs low by buying in far larger quantities than competitors can.
The company’s large size gives it a bigger research and development budget that its peers. Johnson & Johnson’s research and development spending by year is shown below:
- $9 billion in 2015
- $8.5 billion in 2014
- $8 billion in 2013
This spending has produced tangible results. Johnson & Johnson generates about 25% of revenue from products it has developed in the last 5 years. The company’s pharmaceutical portfolio in particular is benefiting from large research and development spending.
Johnson & Johnson commands premium pricing through its well-known brands. The company supports its consumer brands and pharmaceuticals with large advertising spending. The company spends around $2.5 billion every year on advertising.
Johnson & Johnson is currently trading for a forward price-to-earnings ratio of 16.0. The company is cheaper than the S&P 500 despite being of a much higher quality than the average business.
Johnson & Johnson will not deliver rapid growth for shareholders. Earnings-per-share have grown at just 5.5% a year over the last decade. With that said, the company does have a solid dividend yield of ~2.8% and scores very high marks for safety. As a result, the company ranks well using The 8 Rules of Dividend Investing.
#11 – Wells Fargo (WFC)
Dividend Yield: 2.9%
Price-to-Earnings Ratio: 13.0
Years of Steady or Rising Dividends: 7
Percent of Warren Buffett’s Portfolio: 17.5%
10 Year Book-Value-Per-Share Growth Rate: 12.0%
Wells Fargo is Berkshire Hathaway’s 2nd largest holding. There are many reasons for that.
Warren Buffett has 17.5% of his portfolio allocated to Wells Fargo. The company has grown to become the 2nd largest bank in the U.S. based on its $265 billion market cap. For comparison, Chase (JPM) has a $283 billion market cap.
Wells Fargo’s growth over the last decade has been impressive. The company has managed to compound book-value-per-share at 12% a year.
Wells Fargo’s growth does not come from unnecessary risks. The company managed to remain profitable throughout the Great Recession of 2007 to 2009.
Dividend investors were not happy with results, however. Wells Fargo cut its dividend payments in 2009 and again in 2010. Wells Fargo’s book-value-per-share actually increased in 2008 and 2009. This is impressive considering the financial world was in a full-on meltdown at the time.
Wells Fargo’s operations are divided into 3 primary segments:
- Community Banking
- Wholesale Banking
- Wealth/Brokerage/Retirement
The company’s Community Banking segment is its largest, followed by wholesale banking. Together, these 2 segments generate over 90% of Wells Fargo’s income.
The Wells Fargo brand is well known in the United States. Wells Fargo has a carefully honed reputation for trust and good service. This has grown the company to become the number 1 in the U.S. in the following categories:
- Middle market commercial lender
- Commercial real estate originator
- Small business lender
- Mortgage originator
- Retail deposits
- Auto lender
Rising interest rates will benefit Wells Fargo. Rising interest rates tend to increase the spread on interest earned and interest paid on deposit accounts.
This makes Wells Fargo a good choice to partially hedge against rising interest rates.
Wells Fargo currently trades for a price-to-earnings ratio of just 13.0. This is well below the S&P 500’s price-to-earnings-ratio of ~25.
Wells Fargo is clearly superior to both the average bank and the average business in the S&P 500. The company’s low price-to-earnings ratio is very reasonable. These shares are likely trading at a discount to fair value.
Now is a good time for dividend growth investors looking to start a position in this market-leading bank to buy in.
#10 – The Kraft Heinz Company (KHC)
Dividend Yield: 2.9%
Price-to-Earnings Ratio: 23.0 (forward P/E ratio)
Years of Steady or Rising Dividends: 45 (including history with Kraft, Mondelez, and Philip Morris)
Percent of Warren Buffett’s Portfolio: 22.6%
10 Year Earnings-Per-Share Growth Rate: N/A due to recent merger
Warren Buffett has decided to drastically increase his ownership in Kraft Foods. He teamed up with 3G Capital to merge Kraft with Heinz.
The merger between Kraft and Heinz gives Berkshire Hathaway and 3G control of 51% of the new company. Kraft shareholders own the remaining 49% of the newly combined Kraft-Heinz company.
The merger builds on the success of 3G Capital. 3G Capital has generated excellent returns by purchasing and aggressively expanding United States brands. 3G Capital’s prior success stories include Budweiser (BUD) and Burger King.
3G Capital’s methodology pairs well with Warren Buffett’s. Together they make an ideal team for purchasing and expanding high quality brands in slow changing industries.
Shareholders will benefit from synergies in the recently formed company. The management expertise of 3G Capital and Warren Buffett is a bonus.
Kraft’s dividend payments are continuing following the merger. The company’s regular share repurchases are scheduled to be suspended for 2 years following the merger.
Kraft Heinz has 8 brands that generate $1 billion or more a year in sales. The combined company has sales of $22 billion a year.
The bulk of these sales come from North America. This makes Kraft-Heinz the 3rd largest food and beverage corporation in North America based on sales. Only PepsiCo (PEP) and Nestle are larger.
Kraft Heinz will generate growth going forward by leveraging its well-known brands. The company is also working to expand internationally.
In addition, Kraft Heinz is realizing significant cost savings by implementing zero-based-budgeting and continuing to realize cost reductions from the merger.
#9 – Wal-Mart (WMT)
Dividend Yield: 2.9%
Price-to-Earnings Ratio: 15.3
Years of Steady or Rising Dividends: 43
Percent of Warren Buffett’s Portfolio: 0.7%
10 Year Earnings-Per-Share Growth Rate: 7.4%
Wal-Mart generates revenues of $484 billion over the last 12 months. Wal-Mart is the largest corporation in the world based on revenue – by a wide margin (PetroChina is 2nd with $230 billion in revenue over the last 12 months).
The retail industry is moving towards a mix of low price and convenience and a combination between online and physical. Wal-Mart is focusing on growing its online sales. The company recently acquired Jet.com for $3 billion.
In addition to Wal-Mart’s push for greater online sales, the company is also investing in its employees. Specifically, Wal-Mart is increasing its base pay. These moves appear to be working. Wal-Mart has realized comparable store sales growth in every quarter for around 2 years.
Wal-Mart has increased its dividend payments for 43 consecutive years. This makes the company one of 50 Dividend Aristocrats.
A company must have a strong and durable competitive advantage to have such a long dividend streak. Wal-Mart’s competitive advantage comes from its scale and operating efficiency. Its size allows it to command the best prices from its suppliers. The company pressures suppliers to lower their prices and then passes savings on to consumers, resulting in a positive feedback loop.
Wal-Mart’s short-term earnings-per-share growth will likely be negative as the company continues to invest heavily in wages and digital sales. Over the long-run, Investors should expect total returns of 8% to 10% a year from Wal-Mart. Total returns will come from: 3% to 4% sales growth a year, 2% to 3% share repurchases a year, and a dividend yield of ~3%.
Wal-Mart stock appears cheap at current prices. The company has a price-to-earnings ratio of just 15.3. This compares very favorably to the S&P 500’s price-to-earnings ratio of ~25.
Despite its compelling valuation and historical track record of dividend increases, Buffet recently decreased his stake in Wal-Mart from 2.3% of his portfolio to just 0.7% of his portfolio.
#8 – General Electric (GE)
Dividend Yield: 2.9%
Price-to-Earnings Ratio: 18.5 (forward P/E ratio)
Years of Steady or Rising Dividends: 6
Percent of Warren Buffett’s Portfolio: 0.3%
10 Year Earnings-Per-Share Growth Rate: -1.0%
General Electric the world’s 2nd largest conglomerate based on its’ $274 billion market cap.
Berkshire Hathaway is the only larger conglomerate. Berkshire Hathaway has a market cap of $392 billion.
General Electric shareholders will likely see strong returns over the next few years.
The company is committed to divesting its financial businesses. General Electric is focused on becoming a true manufacturing conglomerate. The company got into trouble by focusing on financial services.
General Electric is undoing this long-standing strategic error by divesting its GE Capital business. The company has already divested large portions to Wells Fargo and Blackstone Group. The company has made many other small deals for pieces of its large financial business.
General Electric also fairly recently spun-off its retail finance and credit card division – Synchrony Financial (SYF).
The divestiture of GE Capital is a positive sign for General Electric shareholders. The company is focusing on what it does best. Namely, manufacturing a diverse range of products.
To this end, the company recently announced it will spin-off and merge its oil and gas business with Baker Hughes. The move will create the second largest oil and gas services business.
General Electric’s management is actively seeking to make the company smaller and more profitable. When this happens there is a high likelihood shareholders will see strong gains. That is because the company can focus on what it does best. Weaker segments are sold to focus on the company’s core advantages.
General Electric currently trades at a forward price-to-earnings ratio of 18.5. Additionally, the company has an above average 3.0% dividend yield.
Investors in General Electric today will likely do much better than they have done over the last decade. This is thanks to the company’s:
- reasonable forward price-to-earnings ratio
- high dividend yield
- large divestiture plans.
General Electric appears to be trading around fair value given its forward price-to-earnings ratio.
#7 – Phillips 66 (PSX)
Dividend Yield: 3.0%
Price-to-Earnings Ratio: 22.2
Years of Steady or Rising Dividends: 37 (including history with ConocoPhillips)
Percent of Warren Buffett’s Portfolio: 5.0%
10 Year Earnings-Per-Share Growth Rate: N/A
Phillips 66 was created in 2012 when ConocoPhillips spun off the following pieces of its business:
- Downstream operations
- Chemical operations
- Retail fuel (gas stations) operations
- Midstream natural gas operations
Phillips 66 refining and chemical divisions fare better than upstream oil operations during periods of low oil prices. The company’s earnings did not ‘fall off a cliff’ in 2015 – unlike many oil corporations.
That’s because as a refiner (a ‘downstream’ oil business) Philips 66’s earnings depend on the crack spread rather than the absolute price of oil. The crack spread has declined recently, reducing Phillips 66’s earnings – and increasing its price-to-earnings ratio.
The company is currently trading at a price-to-earnings ratio of 22.3. Phillips 66 stock is not the bargain it once was. It is likely either fairly valued or a bit overvalued at current prices.
But Phillips 66 does pay an above average dividend yield of 3.0%.
In addition to its above-average dividend yield, Phillips 66 has also been gobbling up its own shares through share repurchases. The company is averaging share repurchases of over 5% of shares outstanding a year.
Share repurchases will likely slow somewhat due to a mix of both higher share price and lower earnings. At current prices, the company’s shareholder yield will likely be closer to 5%.
The company plans to grow through continued expansion in the United States. Phillips 66 will focus it growth capital expenditures on increasing its midstream and chemical capabilities.
Overall, investors in Phillips 66 can expect mid-single digit growth in operations boosted by the company’s aggressive share repurchases and dividend yield for total returns around 10% a year.
#6 – Procter & Gamble (PG)
Dividend Yield: 3.3%
Price-to-Earnings Ratio: 23.4
Years of Steady or Rising Dividends: 60
Percent of Warren Buffett’s Portfolio: 0.0% (very small amount)
10 Year Earnings-Per-Share Growth Rate: 5.8%
Warren Buffett exchanged $4.3 billion worth of Procter & Gamble shares for Duracell.
Even after this transaction, Buffett still has a small holding in Procter & Gamble.
Procter & Gamble recently shed its non-core and underperforming brands to create a more focused organization.
The company has streamlined operations. Procter & Gamble’s management is wisely focusing on the company’s core brands.
Core brands by category are listed below:
- Oral Care: Key brands are Crest and Oral-B
- Baby Care: Key brands are Pampers and Loves
- Family Care: Key brands are Bounty and Charmin
- Feminine Care: Key brands are Always and Tampax
- Grooming: Key brands are Gillette, Venus, and Braun
- Fabric Care: Key brands are Tide, Ariel, Gain, and Downy
- Personal Health Care: Key brands are Metamucil and Nyquil
- Skin & Personal Care: Key brands are Olay, SK-II, and Old Spice
- Home Care: Key brands are Dawn, Febreeze, Swiffer, and Cascade
- Hair Care: Key brands are Pantene, Head & Shoulders, Herbal Essence, and Rejoice
Procter & Gamble has performed well since refocusing its operations on core brands. The company’s growth in earnings is being fueled by increasing operating efficiency and cost-cutting.
Procter & Gamble has a low-risk business model. The company owns well-known brands that operate in slow-changing industries. Procter & Gamble supports its brands with massive advertising spending of $8 to $9 billion a year.
The company is expecting ‘mid to high’ single digit long-term constant-currency earnings-per-share growth. This gives a range of 5% to 9% over the long-run. And Procter & Gamble has done very well over the long-run…
Procter & Gamble has one of the longest streaks of consecutive annual dividend increases of any business. The company is one of only 18 Dividend Kings; businesses with 50+ consecutive years of dividend increases.
But despite its amazing history, Procter & Gamble is a bit overvalued considering its forward price-to-earnings ratio of 23.4.
The company is an example of a high quality businesses trading at a slightly elevated price.
#5 – Coca-Cola (KO)
Dividend Yield: 3.4%
Price-to-Earnings Ratio: 25.1
Years of Steady or Rising Dividends: 54
Percent of Warren Buffett’s Portfolio: 13.1%
10 Year Earnings-Per-Share Growth Rate: 5.9%
Coca-Cola is Warren Buffett’s 3rd largest holding (behind Wells Fargo and Kraft-Heinz). Berkshire Hathaway has around $18.1 billion invested in Coca-Cola.
Coca-Cola is the global leader in ready-to-drink beverages. The company has 20 brands that generate $1 billion or more per year in sales. Also, the Coca-Cola soda brand is the most popular in the world by a wide margin.
Coca-Cola has increased its dividend payments for over 5 decades. The company possesses a strong competitive advantage. Coca-Cola’s competitive advantage stems from its powerful brands.
The company supports its brands by spending over $3 billion per year on advertising. Coca-Cola can spend more on advertising than any other beverage company (except for perhaps PepsiCo). This further reinforces its competitive advantage.
Despite being an old company, Coca-Cola still has plenty room for growth. Coca-Cola’s earnings-per-share growth will come from a mix of:
- Continued global expansion
- Operating efficiency increases
- Share repurchases
- Rising global populations
The company is using its global distribution power to leverage popular smaller drink brands and sell them worldwide.
Coca-Cola is taking several steps to improve operating efficiency, including:
- Decentralize decision making
- Refranchise U.S. bottling operations
- Better align employee incentives with company goals
Coca-Cola is a high dividend stock thanks to its ~3.5% dividend yield. The company also regularly engages in share repurchases. Over the last 5 years, the company has repurchased about 1.2% of shares outstanding per year.
Share repurchases combined with the company’s dividend gives investors a shareholder yield of ~4.5%. Total returns for Coca-Cola should be 10% or more going forward. Total returns will come from dividends (3%) and earnings-per-share growth (7% or more per year).
There’s no doubt Coca-Cola is a high quality business. The company’s stock does appear to be slightly overvalued at current prices. This makes Coca-Cola a hold, not a buy at current prices.
#4 – IBM (IBM)
Dividend Yield: 3.5%
Price-to-Earnings Ratio: 13.3
Years of Steady or Rising Dividends: 24
Percent of Warren Buffett’s Portfolio: 10.0%
10 Year Earnings-Per-Share Growth Rate: 9.2%
Warren Buffett is known to avoid technology stocks.
He has repeatedly discussed preferring slow changing industries and simple-to-understand businesses.
Competitive advantages in slow changing industries last longer than in fast changing industries…
Warren Buffett shocked the investing community when he began purchasing shares of IBM in 2011.
IBM’s long history of profitability sets it apart from many other technology companies. IBM was founded in 1911 and has grown over the last 100+ years to reach a market cap of $155 billion.
IBM realized above-average earnings-per-share growth of 9.2% a year over the last decade. This growth was a result of increased operating efficiency and resulting margin enhancement. IBM’s revenue has actually declined by 1.3% a year over the last decade.
Despite this, the company has increased its dividend payments for 21 consecutive years. IBM is one of 273 Dividend Achievers; stocks with 10+ consecutive years of dividend increases.
IBM is divesting itself of lower margin businesses. The company is also investing billions into areas offering better growth potential:
- Cloud computing
- Mobile computing
- Analytics
- Information security
The company saw 26% constant currency revenue growth in these key areas in fiscal 2015. Unfortunately for IBM, this growth has not offset declines in its core business.
The problem with IBM is that it exists in the rapidly changing technology sector.
IBM is having difficulty keeping pace in the ever-changing industry. This is reflected in the company’s declining revenue and earnings-per-share.
IBM is a shareholder friendly business like many of Warren Buffett’s other top dividend stocks. The company currently has a 3.5% dividend yield.
IBM has repurchased about 5% of its shares outstanding each year over the last decade for a total shareholder yield of around 8.5%. The company’s large share repurchases are a big part of its earnings-per-share growth.
Poor recent performance has caused IBM’s price-to-earnings ratio to fall significantly. The company is currently trading at a price-to-earnings ratio of just 13.3.
The company’s low price-to-earnings ratio helps offset the business obsolescence risks IBM faces.
The company’s ability to generate rising earnings-per-share over the long run is not as certain as most of Buffett’s other high yield dividend holdings.
#3 – Sanofi (SNY)
Dividend Yield: 4.2%
Price-to-Earnings Ratio: 23.4
Years of Steady or Rising Dividends: 21
Percent of Warren Buffett’s Portfolio: 0.1%
10 Year Earnings-Per-Share Growth Rate: 2.5%
Sanofi is a global pharmaceutical company with a market cap of $107 billion.
The company is headquartered in Paris, France. The company’s revenue by segment in its most recent quarter is below:
- Sanofi Genzyme: 13% of revenue
- Diabetes & Cardiovascular: 16% of revenue
- General Medicines & Emerging Markets: 45% of revenue
- Vaccines: 19% of revenue
- Animal Health: 6% of revenue
The company has significant exposure to emerging markets. Around one-third of sales come from emerging markets.
Sanofi has reached a $100+ billion market cap because of its research and development department. The company’s ability to roll out new and innovative treatments drives revenue.
Sanofi’s number of product launches is increasing. From 2007 to 2013, the company launched 10 products. From 2014 to 2020, Sanofi is expecting 18 product launches.
The image below from Sanofi’s Exane Health Care Conference Presentation shows expected launches to 2020.
Sanofi is a shareholder friendly company. The company has increased its dividend payments each year for the past 21 years (measured in Euros, not USD).
The company is also regularly engages in share buybacks. Sanofi has reduced its net share count by about 1% in the last 2 years. Sanofi will likely continue to increase share repurchases to increase the value of each share. Sanofi’s 4%+ dividend yield and share repurchases give the company a 5%+ shareholder yield.
Sanofi’s current price-to-earnings ratio of 23.4 is a bit on the high side. The company is expecting solid growth from its new launches over the coming several years.
Sanofi’s research and development competitive advantage, large size, and presence in the stable health care sector make the company a relatively low-risk investment – especially if the price-to-earnings ratio declines below 20.
#2 – General Motors (GM)
Dividend Yield: 4.6%
Price-to-Earnings Ratio: 3.8
Years of Steady or Rising Dividends: 3
Percent of Warren Buffett’s Portfolio: 1.2%
10 Year Earnings-Per-Share Growth Rate: N/A
General Motors (in)famously declared chapter 11 bankruptcy in 2009. The United States government sold the last of its General Motors stock in 2013…
But there’s more to this stock than its bankruptcy history. General Motors’s corporate history goes back more than 100 years. The company is a high-yield blue-chip business.
General Motors has been profitable every year since relisting on the stock market in 2010. The company is the United States’ largest automobile manufacturer. The company has ~17% market share in the United States car and truck market. The company has 10% global market share.
Around 40% of the company’s revenue is now generated overseas. General Motors is one of the United States larger exporters.
General Motors has mediocre growth prospects. The company is expected to beat inflation growth. I expect earnings-per-share to grow between 2% and 6% a year over the long run.
The company is realizing higher operating income margins now thanks to its focus on cost control. The company has made good inroads into the Chinese automotive market. General Motors saw the number of vehicles delivered in China grow 5.7% in its most recent quarter versus the same quarter a year ago.
What stands out about General Motors is:
- Its high dividend yield of 4.6%
- Its low price-to-earnings ratio of 3.8
No, that isn’t a type. Genearl Motors has a price-to-earnings ratio of 3.8.
General Motors’ high yield and low price-to-earnings ratio should appeal to value oriented investors. A price-to-earnings ratio under 10 is rare in this market. Under 5 is nearly unheard of…
Also, The company has a low payout ratio of just 16.8%. This gives investors protection if earnings fall due to the global growth slowdown.
General Motors will likely increase dividend payments above earnings-per-share growth going forward. This will result in a rising payout ratio.
General Motors makes a compelling investment at current prices. That’s because of its exceptionally low price-to-earnings ratio and high dividend yield. Investors will realize double-digit total returns from General Motors if the company hits the top end of its expected earnings-per-share growth rate. Investors will likely see additional gains as the company’s price-to-earnings ratio rises.
A price-to-earnings ratio of under 5 is far too low for a company with positive expected growth – especially in today’s overvalued market.
#1 – Verizon (VZ)
Dividend Yield: 4.8%
Price-to-Earnings Ratio: 14.0
Years of Steady or Rising Dividends: 31
Percent of Warren Buffett’s Portfolio: 0.6%
10 Year Earnings-Per-Share Growth Rate: 7.5%
Verizon is the highest yielding stock in Warren Buffett’s portfolio. It is the only stock in Buffett’s portfolio with a dividend yield near 5%…
Verizon and AT&T (T) are the two market leaders in the oligopolistic telecommunications industry. These two corporations each control around 33% of the wireless industry in the United States.
Verizon has a market cap of $196 billion, making it the 17th largest publicly traded corporation in the United States (for comparison, AT&T’s market cap is $232 billion).
Verizon, AT&T, T-Mobile, and Sprint account for 90% of the United States wireless industry. The oligopolistic wireless industry is not good for consumers. It is great for businesses in the industry (and investors) which reap above market rate profits from the lack of competition.
Verizon positioned itself for future growth with several recent acquisitions:
- $4.8 billion for Yahoo! (YHOO)
- $4.4 billion for AOL
- $2.4 billion for Fleetmatics (a GPS tracking/vehicle software company)
- Undisclosed amount for Telogis (a ‘smart’ vehicle company)
- Undisclosed amount for Complex (a pop culture focused site)
- Undisclosed amount for Volicon (digital video monitoring, archiving, and creation)
- Undisclosed amount for Sensity Systems (an internet of things company)
Verizon is benefiting from consumers using more data on their mobile devices. Additionally, more devices (cars, home appliances, etc.) are beginning to be connected to the internet.
Increased wireless data usage helped Verizon grow its earnings-per-share at 4.5% a year over the last decade.
Investors in Verizon should expect total returns of ~9% a year from the company going forward. Total returns will come from dividends (~5%) and earnings-per-share growth (~4%).
Verizon appears undervalued at this time relative to its total return prospects. The company has a price-to-earnings ratio of just 14.0.
Article by Sure Dividend
