Warren Buffett’s Top 20 High Dividend Stocks

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Updated February 24th, 2017 by Nicholas McCullum

I think you’ll agree with me that high dividend stocks can be excellent investments for those looking for both:

  1. Current income
  2. Strong 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 February 14th, 2017, Buffett released his latest 13F filing.

Free PDF Download: Get exclusive access to the free 1 page PDF executive summary detailing the exact strategy Warren Buffett used to grow his wealth to $60+ billion.

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.

If you are interested in seeing more detail about Warren Buffett’s investment portfolio, you can click here to download an excel document that contains each of Buffett’s holdings along with dividend yields, price-to-earnings ratios, how many shares Buffett owns, and the market value of Berkshire’s investment.

  • Bank of New York Mellon (BK): 1.6% dividend yield
  • American Express (AXP): 1.6% dividend yield
  • M&T Bank Corporation (MTB): 1.7% dividend yield
  • Apple, Inc. (AAPL): 1.7% dividend yield
  • Mondelez International (MDLZ): 1.8% dividend yield
  • Monsanto Company (MON): 2.0% dividend yield
  • U.S. Bancorp (USB): 2.0% dividend yield
  • Kraft Heinz (KHC): 2.5% dividend yield
  • Wells Fargo (WFC): 2.6% dividend yield
  • Johnson & Johnson (JNJ): 2.7% dividend yield
  • Wal Mart Stores (WMT): 2.9% dividend yield
  • Procter & Gamble (PG): 2.9% dividend yield
  • International Business Machines (IBM): 3.1% dividend yield
  • United Parcel Service (UPS): 3.1% dividend yield
  • General Electric (GE): 3.2% dividend yield
  • Phillips 66 (PSX): 3.2% dividend yield
  • The Coca-Cola Company (KO): 3.4% dividend yield
  • Sanofi (SNY): 3.9%% dividend yield
  • General Motors (GM): 4.1% dividend yield
  • Verizon (VZ): 4.7% 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.

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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 2.9% (and make up 57% 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 stocks in detail.

Warren Buffett’s Recent Investment Activity

When Berkshire Hathaway published their most recent 13F filing with the Securities Exchange Commission, there were two developments that stood out to investors.

Firstly, Buffett has purchased a substantial stake in the airline industry, spread out over four different companies:

  • Delta Air Lines, Inc. (DAL): 60,025,995 shares
  • Southwest Airlines Co. (UAL): 43,203,775 shares
  • United Continental Holdings Inc. (UAL): 28,951,353 shares
  • American Airlines Group Inc. (AAL): 45,544,854

While none of these stocks make it into this top 20 list because of their low (or nonexistent) dividend yields, Buffett’s stake in these companies is worth approximately $9.9 billion – a significant proportion of his investment portfolio.

For many investors, this is puzzling. Buffett has been vocally critical of the airline industry in the past, saying in 2013 that airlines are a “deathtrap for investors”.

However, Berkshire’s management appears to have had a change of heart. Charlie Munger, Berkshire’s Vice Chairman, was recently quoted as saying:

“[Railroads were] a terrible business for about 80 years, but finally they got down to four big railroads and it was a better business. And something similar is happening in the airline business.”

This has led many investors to posit that Berkshire may be interested in fully purchasing an aircraft, similar to what they did with the BNSF railroad in 2010.

The second surprising fact contained in Berkshire Hathaway’s 13F was their increased stake in Apple (AAPL). In between his last two 13F filings, Buffett had purchased 42,131,950 additional shares of Apple.

Buffett has notably stayed away from technology stocks in the past. However, in the technology industry, there are few companies that exhibit as strong of a competitive advantage as Apple does.

Apple is now Berkshire Hathaway’s seventh largest holdings with a market value of ~$6.6 billion.

Moving on, Warren Buffett’s top 20 dividend stocks (sorted by yield) will now be analyzed in detail.

Warren Buffett's Top 20 Dividend Stocks With the Highest Yields

#20 – Bank of New York Mellon (BK)

Dividend Yield: 1.6%
Price-to-Earnings Ratio:  15.1
Years of Steady or Rising Dividends: 8 years
Percent of Warren Buffett’s Portfolio: 0.7%
10 Year Earnings-Per-Share Growth Rate: 5.1% per year

BNY Mellon is a large-scale investment management and capital markets corporation. And when I say large scale, I really mean it. The company’s figures are impressive:

  • $1.6 trillion of assets under managements
  • $29.9 trillion of assets under custody and administration
  • 52,000+ employees
  • 100+ markets served
  • 35 countries with a BNY Mellon presence

Clearly, BNY Mellon is a leader in their industry. More details about their operating model can be seen below.

BK Client Investment Solutions

Source: BNY Mellon Client Investment Solutions Handout

BNY Mellon is coming off of a strong year. Their financial performance was driven by the current macroeconomic environment.

Rising interest rates have led to higher fees earned by BNY Mellon from their money market products. Further, higher rates mean more revenue from BNY Mellon’s Securities Lending division. The only major negative for BNY Mellon during fiscal 2016 was the continued strength of the U.S. dollar.

All of this culminated in the company’s GAAP EPS increasing by 16%.

BK Summary Financial Results for Full-Year 2016 - GAAP

Source: BNY Mellon Fourth Quarter Investor Presentation, slide 5

Looking ahead, it is reasonable to believe that rates will continue to increase, at least domestically. The Federal Reserve has hinted at executing a rate hike sometime in March, and they have explicitly stated that they aim to increase rates three times in 2017.

BNY Mellon is an attractively valued stock that will benefit from this trend, with a price-to-earnings ratio of 15.1. Further, the company has managed to grow earnings-per-share at a satisfactory rate over the past decade, 5.1%. Keep in mind that this time period includes the global financial crisis – performance would have been much better otherwise.

Overall, investors in BNY Mellon can likely expect earnings-per-share growth of 6%-8% over the long run, which gives total returns of 7.6%-9.6% when including their 1.6% dividend yield.

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#19 – American Express (AXP)

Dividend Yield: 1.6%
Price-to-Earnings Ratio: 14.2
Years of Steady or Rising Dividends: 40 years
Percent of Warren Buffett’s Portfolio: 7.7%
10 Year Earnings-Per-Share Growth Rate: 6.8% per year

American Express is a large credit services business with a market cap of $73 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 more than one quarter 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 – this major corporate scandal involved a company obtaining loans based on falsified inventory of salad oil (the barrels were mostly filled with water). American Express suffered default losses because of this fraud, and their stock price was beaten down to unreasonable levels.

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 a world-renowned company. Fiscal 2016 marked a successful year for American Express,

AXP FY 16 Summary Financial Performance

Source: American Express Fourth Quarter Investor Presentation, slide 2

The company saw diluted earnings per share grow by 12%. This was driven by share repurchases, as the company’s net income grew by only 5% and the remaining 7% was due to a reduction in average diluted shares outstanding.

For investors, a major benefit of holding American Express stock is their history of returning capital to shareholders. When considering both dividends and share repurchases, American Express consistently delivers almost 100% of their net income back to their shareholders.

AXP Capital and Payout Ratios

Source: American Express Fourth Quarter Investor Presentation, slide 15

However, this leaves little cash available for the company to fund organic growth. For fiscal 2017, American Express is forecasting earnings-per-share of $5.60-$5.80. Based on fiscal 2016’s diluted earnings-per-share of $5.65, this represents a maximum bottom line growth rate of 0.2%.

AXP 2017 EPS Growth Outlook

Source: American Express Fourth Quarter Investor Presentation, slide 16

The company trades for a price-to-earnings ratio of 14.2.  The S&P 500 currently has a price-to-earnings ratio of around 25.  American Express is trading for just over half the valuation of the S&P 500.

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 to be trading around fair value at current prices.

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#18 – M&T Bank Corporation (MTB)

Dividend Yield: 1.7%
Price-to-Earnings Ratio: 21.6
Years of Steady or Rising Dividends: 26 years
Percent of Warren Buffett’s Portfolio: 0.6%
10 Year Earnings-Per-Share Growth Rate: 0.5%

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. The company’s above-average return on equity is compared to a peer group in the following diagram.

MTB Consistently Profitable Throughout the Cycle

Source: M&T Bank Corporation Presentation at the BancAnalysts Association of Boston, slide 8

What is most remarkable is the consistency of M&T’s return on equity. In the above diagram, M&T’s boxplot for their return on tangible common equity is remarkably narrow, which indicates low variance.

This allows the bank to be profitable throughout business cycles.

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 financial results for the bank. Since 1983, M&T has grown their net operating earnings-per-share by 15% per year and their dividends by 13% per year.

MTB Earnings and Dividend Growth

Source: M&T Bank Corporation Presentation at the BancAnalysts Association of Boston, slide 19

This is remarkable not just because of the high numbers (15% and 13%), but because of the remarkably long length of time over which this has occurred. As one would expect, this impressive financial performance has translated into strong shareholder returns. Since 1983, M&T’s stock return CAGR has been 14.3%, which is the top among the 100 largest banks that were operating at the beginning of that period.

MTB M&T Bank Corporation...a Solid Investment

Source: M&T Bank Corporation Presentation at the BancAnalysts Association of Boston, slide 19

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 21.6. This is above average, and likely indicates that the company is overvalued.

However, M&T Bank Corporation’s future looks reasonably bright.  The company’s stock has surged since the presidential election, as the new administration is looking to reduce banking regulations, which will reduce compliance costs and boost earnings for the financial sector.

M&T Bank Corporation has a dividend yield of 1.7%, which is below average for an S&P 500 stock. The company’s dividend yield is often higher than it is today, but has been reduced because of the company’s rising stock price.

Despite their depressed dividend yield, the company is a solid long-term hold for investors looking for exposure to the banking sector.

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#17 – Apple (AAPL)

Dividend Yield:  1.7%
Price-to-Earnings Ratio:  16.4
Years of Steady or Rising Dividends:  6
Percent of Warren Buffett’s Portfolio:  5.0%
10 Year Earnings-Per-Share Growth Rate: 38.5% per year

Apple is the largest corporation in the world based on both earnings (a run rate of $71.6 billion in the last fiscal quarter) and market cap ($720 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

The company (and its investors) enjoy worldwide popularity for their product lineup. In fiscal 2016, the company generated $215.6 billion of revenues and only $86.6 (or 40%) came from within the Americas.

AAPL Sales Data

Source: 2016 10-K, page 24

Apple is currently trading for a price-to-earnings ratio of 16.4.  While this is cheap compared to many other mature technology companies, Apple investors have enjoyed significant multiple expansion in recent months. The stock currently trades at $136, up from $90 in the middle of 2016.

Apple’s share price was depressed because earnings-per-share growth had stalled.  It was a mathematical impossibility the company would manage to keep up its insane growth rate, but the company still has strong business prospects given its size.

Value oriented investors are picking up shares of Apple at bargain prices.  Warren Buffett has joined in on the party – Apple is one of his most recent stock purchases.  The Oracle of Omaha had originally invested around $1 billion in the Palo Alto based juggernaut, and has since multiplied his position many times over (which was just made public in Berkshire’s most recent 13F). Berkshire Hathaway’s portfolio has just under 5% of their capital allocated to Apple.

Apple will not be able to generate eye-popping growth numbers going forward.  With such a low price-to-earnings ratio (especially for a tech company), management has been creating shareholder value through share buybacks.  Apple decreased its share count by 4.9% in 2015 and 4.8% in 2016, and will very likely continue to gobble up undervalued shares.

Additionally, the company pays out a decent 1.7% dividend. While this is below average for an S&P 500 stock, 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.

You can read more Apple analysis on Sure Dividend here.

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#16 – Mondelez International (MDLZ)

Dividend Yield: 1.8%
Price-to-Earnings Ratio: 42.7
Years of Steady or Rising Dividends: 46 including history pre-spinoff from other companies
Percent of Warren Buffett’s Portfolio:  0.02%
10 Year Book-Value-Per-Share Growth Rate: 0.0% per year

Mondelez is the largest confectioner in the world based on its market cap of $68 billion.  The company owns a portfolio of well-known brands.

Mondelez has 8 brands that generate more than $1 billion a year in sales. These brands are easily viewed through a filter on the company’s website, and are displayed below.

MDLZ Billion Dollar Brands

Source: Mondelez Investor Relations

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’ previous parent companies [through Kraft (KRFT)].

Further, the company is expected to benefit from various macroeconomic trends.

One of the most notable is consumers’ focus on well-being and health. Fortunately for Mondelez (and its investors), the company has a wide variety of pre-made snacks that have characteristics that appeal to the health-oriented shopper. Some of the products and attributes can be seen below.

MDLZ 2017 - Unprecedented Well-Being Innovation & Renovation

Source: Mondelez Presentation at the 2017 CAGNY Conference, slide 18

Mondelez is also taking measures to integrate eCommerce into their business model.

Mondelez’ online business model is based on:

  • Gifting snacks to friends and family
  • Purchasing large orders online
  • Paying for a snack subscription

Mondelez is also partnering with a few key players in the space, including Alibaba, Amazon (AMZN), and Wal Mart (WMT).

This has led to Mondelez’ eCommerce snacking platform net revenue growth of 35%+ in 2016.

MDLZ Building $1B+ eCommerce Snacking Platform

Source: Mondelez Presentation at the 2017 CAGNY Conference, slide 28

Despite its stability, Mondelez shares are 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. This is likely because Mondelez is seen as a high-growth investment. Fiscal 2016 saw the company grow adjusted earnings per share by 24% on a constant currency basis.

MDLZ 2016 - Another year of strong performance

Source: Mondelez Presentation at the 2017 CAGNY Conference, slide 31

If the company’s price-to-earnings ratio does decline below 20 (and preferably lower), it will become a more compelling investment. This is unlikely to happen, as Mondelez’ price-to-earnings ratio is above 40 currently.

Recall that The 8 Rules of Dividend Investing triggers an automatic sell when normalized price-to-earnings ratios exceed 40. Investors would do well to avoid Mondelez at current prices.

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#15 – Monsanto Company (MON)

Dividend Yield: 2.0%
Price-to-Earnings Ratio: 30.5
Years of Steady or Rising Dividends: 17 years
Percent of Warren Buffett’s Portfolio: 0.56%
10 Year Earnings-Per-Share Growth Rate: 8.4% per year

Monsanto is one of the world’s largest agricultural companies. Specifically, Monsanto focuses in the agricultural chemicals industry.

Monsanto was founded in 1901 and has since grown to reach a market capitalization of $50 billion. The company operates in two main segments:

  • Seeds & Genomics
  • Agricultural Productivity

The Agricultural Productivity segment is responsible for the production and distribution of Monsanto’s famous ‘Roundup’ brand.

Recently, Monsanto has struggled due to a continued downturn in the global agricultural commodities market. The company has a plan to restore growth, centered around a merger with Bayer. Monsanto shareholders will receive $128 in cash per Monsanto share, which represents a ~14% premium over today’s price of $112.

The transaction is expected to close before the end of 2017.

MON Bayer and Monsanto to Create Global Leader in Agriculture

Source: Monsanto First Quarter Earnings Presentation, slide 5

Even without the Bayer transaction, Monsanto is expecting to return to earnings growth for fiscal 2017, with earnings-per-share in the range of $4.50-$4.90 (up from 2016’s $4.48).

MON Foundation Establised in 2016 for EPS Growth in 2017

Source: Monsanto First Quarter Earnings Presentation, slide 13

With that in mind, Monsanto appears expensive at today’s levels. The company is coming off of a year where earnings-per-share decreased substantially and yet its price-to-earnings multiple exceeds 30. Investors interested in purchasing shares in Monsanto should wait until the stock drops to a more reasonable price.

You can read more Sure Dividend analysis on Monsanto here.

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#14 – U.S. Bancorp (USB)

Dividend Yield: 2.0%
Price-to-Earnings Ratio: 17.0
Years of Steady or Rising Dividends: 8 years
Percent of Warren Buffett’s Portfolio: 3.0%
10 Year Earnings-Per-Share Growth Rate: 2.2% per year

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.

The bank’s operations are split into two halves, with five sub-segments as follows:

Core Banking Businesses

  • Consumer & Small Business Banking
  • Wholesale Banking

Fee Businesses

  • Payment Services
  • Wealth Management
  • Securities Services

Their Core Banking Businesses segment is by far the largest, with its two sub-segments together contributing more than half the bank’s revenues.

USB Core Banking Businesses

Source: U.S. Bancorp at Goldman Sachs US Financial Services Conference, slide 3

With that in mind, tough, it is the Fee Business segments that appears to have the most upside. Each of the three sub-segments has a specific growth catalyst:

  • Payment Services: Technology-Focused Growth
  • Wealth Management: Improved data analytics boosting client relationships
  • Securities Services: Rising interest rates and expansion into European markets

USB Fee Businesses

Source: U.S. Bancorp at Goldman Sachs US Financial Services Conference, slide 4

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.

U.S. Bancorp is also poised to benefit from some positive regulatory dynamics in the near future. To understand why, consider the following diagram.

USB What We Have Achieved

Source: U.S. Bancorp Investor Day Financial Management Presentation,

In the slide above, three of the four bullets under “Observations” are directly related to the compliance costs associated with high levels of regulation after the financial crisis. The new presidential administration has been vocal about reducing regulations in the financial industry, which will be a catalyst for U.S. Bancorp.

U.S. Bancorp currently trades at a price-to-earnings ratio of just 17.0. Banks have traditionally traded at price-to-earnings ratios below those of the overall market due to risk of bank failure and strong competition. This is still the case today.

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 trading somewhere around fair value.

The company makes a compelling choice for investors looking for exposure to the United States banking industry.

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#13 – Kraft Heinz (KHC)

Dividend Yield: 2.5%
Price-to-Earnings Ratio: 33.7
Years of Steady or Rising Dividends: 46 (including history with Kraft, Altria, and Philip Morris)
Percent of Warren Buffett’s Portfolio: 19.6%
10 Year Earnings-Per-Share Growth Rate: N/A due to 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.

Further, Kraft-Heinz’ management is making significant progress to slash costs and grow earnings-per-share.

KHC Q4 and Full Year Financial Summary

Source: Kraft Heinz Fourth Quarter Investor Presentation, slide 3

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 is focusing on reducing leverage and de-risking their business model.

Specifically, Kraft-Heinz has redeemed an issue of preferred shares that will save the company $550 million per year moving forward. The company is targeting a 3x leverage ratio and expects to pay down an additional $2 billion of debt by July of this year. It is only after that debt is repaid that the common will re-initiate its common stock repurchase program.

KHC Strengthening Capital Structure

Source: Kraft Heinz Fourth Quarter Investor Presentation, slide 9

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. A few other well-defined goals for fiscal 2017 are outlined in the following diagram.

KHC 2017 Agenda

Source: Kraft Heinz Fourth Quarter Investor Presentation, slide 9

While the company has a strong track record and compelling growth prospects, its valuation should make investors reconsider purchasing its shares. Kraft-Heinz currently trades at a price-to-earnings ratio above 30. Investors would be much better off by waiting until share decline to a more reasonable level before initiating a position.

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#12 – Wells Fargo (WFC)

Dividend Yield: 2.6%
Price-to-Earnings Ratio: 14.6
Years of Steady or Rising Dividends: 8 years
Percent of Warren Buffett’s Portfolio: 17.7%
10 Year Earnings-Per-Share Growth Rate: 5.0% per year

Wells Fargo is Berkshire Hathaway’s 2nd largest holding. There are many reasons for that.

Warren Buffett has 17.7% of his portfolio allocated to Wells Fargo. The company has grown to become the 2nd largest bank in the U.S. based on its $292 billion market cap.

For comparison, Chase (JPM) has a $324 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.

Further, Wells Fargo’s growth does not come from unnecessary risks which cannot be said about some of the other major financial institutions. 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. In spite of these dividend reductions, 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, with ample amounts of operational diversification.

WFC Diversified Business Model

Source: Wells Fargo Presentation at the Credit Suisse Financial Services Forum, slide 3

The Wells Fargo brand is well known in the United States. Wells Fargo has a carefully honed reputation for trust and good service. However, the company’s trust with customers was recently breached.

In September, Wells Fargo announced that employees in their community banking division had been opening up unauthorized bank accounts on behalf of their customers. In total, 1.5 million fraudulent bank accounts and 565,000 credit cards were opened without permission.

The aftermath of these events were significant. Wells Fargo paid $185 million of fines along with settlements to their affected customers. Further, the Bank’s then-CEO John Stumpf was forced to resign.

This event, while certainly not positive, triggered what was probably an overreaction from the financial markets. Many investors made lots of money by buying Wells Fargo after this announcement and holding through the company’s subsequent runup.

This was a smart move. The underlying business remained strong and Wells Fargo’s competitive advantages remained intact. Further, Wells Fargo just finished another great year from a financial perspective. Performance figures were positive across the board.

WFC Solid Year-Over-Year Results

Source: Wells Fargo Presentation at the Credit Suisse Financial Services Forum, slide 2

Recent scandals aside, Wells Fargo remains 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 comes at an opportune time, as Wells Fargo net interest margin has been on the decline for a number of years.

WFC Net Interest Income Growth Despite NIM Headwinds

Source: Wells Fargo Presentation at the Credit Suisse Financial Services Forum, slide 8

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 14.6. 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.

You can read more Wells Fargo analysis on Sure Dividend here.

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#11 – Johnson & Johnson (JNJ)

Dividend Yield: 2.7%
Price-to-Earnings Ratio: 20.1
Years of Steady or Rising Dividends: 55 years
Percent of Warren Buffett’s Portfolio: 0.02%
10 Year Earnings-Per-Share Growth Rate: 4.7% per year

Johnson & Johnson is a massive healthcare corporation with more than 260 subsidiary companies. The company owns the world’s sixth-largest consumer health company, the sixth-largest biologics, and the fifth-largest pharmaceutical company.

Specific numeric details about Johnson & Johnson’s business can be seen below.

JNJ Full-Year 2016 Earnings

Source: Johnson & Johnson Fourth Quarter Investor Presentation, slide 1

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.

This has translated to strong total shareholder returns over the long run.

JNJ Delivering Strong Total Shareholder Returns

Source: Johnson & Johnson Fourth Quarter Investor Presentation, slide 18

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:

  • $9.1 billion in 2016
  • $9.0 billion in 2015
  • $8.5 billion in 2014
  • $8.0 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.

JNJ Creating Value Through Portfolio Management in 2016

Source: Johnson & Johnson Fourth Quarter Investor Presentation, slide 19

Johnson & Johnson also devotes a significant amount of their resources towards acquiring smaller companies in the healthcare sector. One recent example is Johnson & Johnson’s recent decision to acquire the Swiss biotechnology company Actelion.

JNJ Accretive Impact on EPS

Source: Johnson & Johnson Actelion Transaction Presentation, slide 26

This transaction will be immediately accretive to Johnson & Johnson’s earnings, which is a huge positive for shareholders.

Johnson & Johnson is currently trading for a forward price-to-earnings ratio of 20.1. 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 4.7% 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.  Johnson & Johnson has grown earnings-per-share for 33 consecutive years, longer than any other company to my knowledge.

As a result, the company ranks well using The 8 Rules of Dividend Investing. You can read more Johnson & Johnson analysis on Sure Dividend here.

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#10 – Wal Mart (WMT)

Dividend Yield: 2.9%
Price-to-Earnings Ratio: 
Years of Steady or Rising Dividends: 44 years
Percent of Warren Buffett’s Portfolio: 0.06%
10 Year Earnings-Per-Share Growth Rate: 4.1% per year

Wal Mart has become synonymous with the discount retail industry. There are very few shoppers who aren’t familiar with Wal Mart’s brand and impressive prices.

The company is also the largest in the world based on revenue. In fiscal 2017, the company’s sales were an incredible $485.9 billion.

WMT Wal-Mart Stores, Inc.

Source: Wal Mart 4Q2017 Earnings Presentation, slide 4

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.

WMT Jet Overview

Source: Wal Mart 2016 Investment Community Presentation

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 a Dividend Aristocrat. 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.  This is true for fiscal 2018 as well (Wal Mart’s fiscal years are schedule differently than most companies – they are just beginning fiscal 2018 while most companies are beginning F17).

WMT Guidance

Source: Wal Mart 4Q2017 Earnings Presentation, slide 3

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 15.5.  This compares very favorably to the S&P 500’s price-to-earnings ratio of ~25. If Wal Mart can return to rapid growth through the popularity of eCommerce, multiple expansion will likely be a significant boost towards shareholder returns.

Despite its compelling valuation and historical track record of dividend increases, Buffet recently has been decreasing his stake in Wal Mart over time. Berkshire Hathaway’s portfolio currently has only a 0.06% allocation towards this company.

You can read more Wal-Mart analysis on Sure Dividend here.

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#9 – Procter & Gamble (PG)

Dividend Yield:  2.9%
Price-to-Earnings Ratio:  26.5
Years of Steady or Rising Dividends:  61 years
Percent of Warren Buffett’s Portfolio:  0.02%
10 Year Earnings-Per-Share Growth Rate:  3.3% per year

Procter & Gamble is the largest consumer good conglomerate on the planet. The company’s current market capitalization is a staggering $235 billion.

The company’s roots can be traced as far back as 1837. Procter & Gamble extraordinary longevity speaks to the strength of the company’s brands and the very slow rate of change in the branded consumer products industry.

PG Company Overview

Source: Procter & Gamble Investor Relations Website

Procter & Gamble benefits from a diverse portfolio of branded consumer products. Some of their more popular products are Crest, Tide, Pampers, Head & Shoulders, and Gillette.

PG Product Portfolio

Source: Procter & Gamble Second Quarter Earnings Presentation

Procter & Gamble has underperformed during the last decade. Their earnings-per-share growth (3.3% per year) has not lived up to expectations despite the popularity of the company’s products.

The main driver of the company’s lackluster growth has been their lack of direction. Rather than focusing on any particular brands, Procter & Gamble had over-diversified their product lineup.

However, the company has realized this, and is making steps to shed a great deal of their non-core products. Procter & Gamble is expecting adjusted earnings per share growth in the mid-single digits for fiscal 2017 (their GAAP earnings per share growth will be ~50%, which is not quite accurate because of a recent significant divestiture).

PG FY 2017 Guidance

Source: Procter & Gamble Second Quarter Earnings Presentation

Procter & Gamble currently trades for a price-to-earnings ratio of 26.5. This is below the company’s recent valuation, but still above the mean when considering their long-term historical average.

The company is likely trading above fair value, but remains a hold for investors who already own Procter & Gamble share. You can read more Procter & Gamble Analysis on Sure Dividend here.

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#8 – International Business Machines (IBM)

Dividend Yield:  3.1%
Price-to-Earnings Ratio:  14.5
Years of Steady or Rising Dividends: 25 years
Percent of Warren Buffett’s Portfolio:  9.27%
10 Year Earnings-Per-Share Growth Rate: 7.4% per year

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. This effect was repeated in 2016, when Berkshire Hathaway first purchased shares of Apple.

So what has changed? Has Buffett suddenly become a fan of stocks in the technology industry?

This is not quite the case. 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 solid earnings-per-share growth of 7.4% 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 22 consecutive years.  IBM is one of 273 Dividend Achievers; stocks with 10+ consecutive years of dividend increases.

IBM’s investors benefit from considerable geographic diversification. Roughly half of the company’s revenues come from outside of the Americas.

IBM Geographic Revenue

Source: IBM Fourth Quarter Investor Presentation, slide 17

Looking ahead, IBM is continuing to focus on increasing their profitability margins. The company is divesting itself of lower margin businesses.  The company is also investing billions into areas offering better growth potential, such as:

  • Cloud computing
  • Mobile computing
  • Analytics
  • Information security

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.

However, IBM is a shareholder friendly business like many of Warren Buffett’s other top dividend stocks. The company currently has a 3.1% dividend yield.

The company’s shareholder friendliness extends to its share repurchase policies. 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.

These share repurchases are made possible through IBM’s generation of substantial free cash flow. In fiscal 2016, the company has a Free Cash Flow realization (which is calculated as free cash flow dividend by net income) or 97% – which means that the company is converting almost all of its earnings to free cash flow.

IBM Cash Flow and Balance Sheet Highlights

Source: IBM Fourth Quarter Investor Presentation, slide 17

Poor performance in recent years has hurt IBM’s stock price. The company currently trades around $181, and it could be purchased back in 2013 for ~$215. Even when counting dividends, IBM’s recent total returns have been terrible.

Naturally, this has contracted IBM’s price-to-earnings ratio The company is currently trading at a price-to-earnings ratio of just 14.5. Considering that IBM is a technology company, this is a very cheap valuation multiple.

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.

You can read more IBM analysis on Sure Dividend here.

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#7 – United Parcel Service (UPS)

Dividend Yield: 3.1%
Price-to-Earnings Ratio: 28.0
Years of Steady or Rising Dividends: 34 years
Percent of Warren Buffett’s Portfolio:  0.00%
10 Year Earnings-Per-Share Growth Rate: 4.1% per year

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 $90 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.

As the largest freight company, this trend certainly applies to UPS. 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 . 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.

Further, the company is making significant internal investments to streamline their operations and reduce maintenance costs going forward. One notable example is UPS’ recent investments in their airline fleet. The company has agreed to purchase 14 new 747s from Boeing (BA). This will help UPS to maintain their status as having the youngest aircraft fleet in the industry.

UPS Investing to Create Value and Returns

Source: UPS Presentation at the R.W. Baird 2016 Industrials Conference, slide 4

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.

United Parcel Service has also been driving growth via acquisitions. One notable example is the recent announcement to acquire Marken. Details about the transaction can be seen below.

UPS To Acquire Marken

Source: UPS Presentation at the R.W. Baird 2016 Industrials Conference, slide 5

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 Services’ combination of growth potential shareholder friendly management are likely why the company has a place in Bill Gates’ stock portfolio – as well as Warren Buffett.

The company’s growth prospects look attractive. For 2017-2019, UPS expects earnings-per-share in the range of 9%-13% per year.

UPS 2016 and Long-Term Outlook

Source: UPS Presentation at the Bernstein Strategic Decisions Conference, slide 8

UPS is currently trading at a rather high valuation multiple because of a recent earnings miss. The company’s average price-to-earnings multiple is 18.3 and they currently trade at 28.0. UPS is almost certainly trading above fair value.

Despite their unattractive valuation, UPS is a low-risk business in a fairly slow-changing industry.  Investors would do well to pick up share of this company if the stock drops to a more reasonable level.

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#6 – General Electric (GE)

Dividend Yield: 3.2%
Price-to-Earnings Ratio: 30.0
Years of Steady or Rising Dividends: 7 years
Percent of Warren Buffett’s Portfolio:  0.2%
10 Year Earnings-Per-Share Growth Rate: -2.8% per year

General Electric the world’s 2nd largest conglomerate based on its’ $262 billion market cap.

Berkshire Hathaway is the only larger conglomerate.  Berkshire Hathaway has a market cap of $419 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.  Further, General Electric 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 has also been making strategic acquisitions in arenas the company is familiar with. One notable example is the Alstom transaction, which is described below.

GE Alstom Integration

Source: General Annual 2016 Annual Outlook Presentation, slide 2

General Electric’s management is actively seeking to make the company smaller and more profitable.  When this happens there is a high likelihood that shareholders will see strong gains.

This is because the company can focus on what it does best as weaker segments are sold to focus on the company’s core advantages.

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:

  1. reasonable forward price-to-earnings ratio
  2. high dividend yield
  3. large divestiture plans.

Details about the companies next two years can be seen in the following diagram from the company’s 2016 Annual Outlook Presentation.

GE Framing 2017 + 2018

Source: General Annual 2016 Annual Outlook Presentation, slide 2

More specific details about the company’s fiscal 2017 outlook can be seen in the following slide. Investors should be encouraged to see continued share buybacks from General Electric, expected to be in the range of $11-$13 billion.

GE 2017 Operating Framework

Source: General Electric Fourth Quarter Earnings Presentation, slide 14

General Electric currently trades at a forward price-to-earnings ratio of 30.0.  The company is trading at a high valuation multiple considering their size and growth prospects. However, the company has an above average 3.0% dividend yield.

You can read more General Electric analysis on Sure Dividend here.

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#5 – Phillips 66 (PSX)

Dividend Yield: 3.2%
Price-to-Earnings Ratio: 27.0 
Years of Steady or Rising Dividends: 38 (including pre-spinoff history with ConocoPhillips)
Percent of Warren Buffett’s Portfolio: 4.0%
10 Year Earnings-Per-Share Growth Rate: N/A (spinoff)

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

Since its spinoff, Phillips 66’s performance has been well above average. The company has outperformed both its peer group and the overall stock market as measured by the S&P 100.

PSX Delivering Shareholder Returns

Source: Phillips 66 February 2017 Investor Update, slide 18

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.

This is partially due to the midstream segment of Phillips 66’s operations. Midstream oil companies (or pipeline companies) are paid for the transportation of oil, regardless of its price. This means that midstream oil companies are insulated from swings in the underlying commodity (at least compared to their peers in the downstream and upstream sub-segments).

Phillips 66’s significant midstream operations can be seen in the following diagram.

PSX Integrated Midstream Network

Source: Phillips 66 February 2017 Investor Update, slide 5

Further, as a refiner (a ‘downstream’ oil business), Philips 66’s earnings depend on the crack spread rather than the absolute price of oil.  A large proportion of Phillips 66’s operations are downstream, as depicted below.

PSX Diversified Refining Portfolio

Source: Phillips 66 February 2017 Investor Update, slide 11

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 27.0.  Phillips 66 stock is not the bargain it once was.  The company is likely trading above its fair value.

But Phillips 66 does pay an above average dividend yield of 3.2%.

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.

Even better, the company’s cumulative distributions (defined as share repurchases plus total dividends) have been on the rise every single year since their spinoff from ConocoPhillips. This can be seen in the following diagram.

PSX Distributions

Source: Phillips 66 February 2017 Investor Update, slide 17

Share repurchases will likely slow somewhat due to a mix of both higher share price and lower earnings.

Investors shouldn’t be concerned by the reduced share repurchases, though. Phillips 66 still has strong growth prospects. 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.

You can read more Phillips 66 analysis on Sure Dividend here.

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#4 – The Coca-Cola Company (KO)

Dividend Yield: 3.4%
Price-to-Earnings Ratio:
Years of Steady or Rising Dividends: 
55 years
Percent of Warren Buffett’s Portfolio: 
10 Year Earnings-Per-Share Growth Rate: 

Coca-Cola is the gold standard in the beverage industry, and a well-known dividend growth stock. In fact, Coca-Cola is the most popular dividend growth stock among dividend growth bloggers. This speaks to the company’s high-quality business model.

Given that Buffett is a vocal fan of investing in high-quality businesses, it’s no surprise that the Oracle of Omaha holds a large amount of KO stock. Coca-Cola is Warren Buffett’s 3rd largest holding (behind Wells Fargo and Kraft-Heinz). Berkshire Hathaway has around $16.6 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.

KO Our Portfolio Includes 20 Billion-Dollar Brands

Source: Coca-Cola Investor Infographic

Coca-Cola has increased its dividend payments for over 5 decades. In fact, the company recently announced their 55th consecutive annual dividend increase. This would not be possible without a strong competitive advantage – and Coca-Cola certainly possesses one.

Coca-Cola’s competitive advantage stems from its powerful brands. Further, Coca-Cola benefits from a highly globalized distribution network.

KO 2016 Organic Revenue (Non-GAAP)

Source: Coca-Cola Fiscal 2016 Investor Inforgraphic

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:

  • Decentralizing decision making
  • Refranchising bottling operations
  • Better align employee incentives with company goals

Of particular note is the company’s refranchising of their bottling operations. The company is divesting its Bottling Investments Group (BIG) to third-party beverage bottlers. The pro-forma company will be a smaller Coca-Cola with higher profit margins.

The company’s recent progress on this strategic initiative can be seen in the following slide.

KO We Are Building a Stronger System

Source: Coca-Cola December 2016 Investor Presentation, slide 9

Once the company has divested of their capital-intensive bottling operations, they expect their in-house unit case volume to decline from 18% to 3%. Further, they will be reducing their employee count from 123k to 39k.

KO Post Transformation, We Will Look Very Different Than We Do Today

Source: Coca-Cola December 2016 Investor Presentation, slide 10

Coca-Cola is a high dividend stock thanks to its ~3.4% 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. Further, in the time period between 2011 and 2015, Coca-Cola returned more than $39 billion of value to its shareholders.

KO We Return Significant Cash to Shareowners

Source: Coca-Cola December 2016 Investor Presentation, slide 48

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. However, at a price-to-earnings ratio of 27.8, 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.

You can read more Coca-Cola analysis on Sure Dividend here.

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#3 – Sanofi (SNY)

Dividend Yield: 3.9%
Price-to-Earnings Ratio: 23.6  
Years of Steady or Rising Dividends:  22 years
Percent of Warren Buffett’s Portfolio: 0.11%
10 Year Earnings-Per-Share Growth Rate: 0.2%

Sanofi is a large globalized pharmaceutical company with a market capitalization in excess of $100 billion.

The company is headquartered in Paris, France.  The company reports financial results in five segments:

  • Sanofi Genzyme
  • Diabetes & Cardiovascular
  • General Medicines & Emerging Markets
  • Vaccines
  • Animal Health

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.

SNY Returns from R&D Are Expected to Substantially Improve

Source: Exane Health Care Conference Presentation, slide 16

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). American investors can purchase Sanofi’s ADR, which gives them domestic exposure to this international company.

The company is also regularly engaging 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 3.9% dividend yield and share repurchases give the company a ~5% shareholder yield.

Sanofi’s current price-to-earnings ratio of 23.6 is a bit on the high side.  While the company is expecting solid growth from its new launches over the coming several years, I do not believe that the company’s valuation is justified. As such, the company is a hold right now – though this would change if the company’s valuation were to drop significantly.

You can read more Sanofi analysis on Sure Dividend here.

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#2 – General Motors (GM)

Dividend Yield: 4.1%
Price-to-Earnings Ratio:
Years of Steady or Rising Dividends: 4 years
Percent of Warren Buffett’s Portfolio: 
10 Year Earnings-Per-Share Growth Rate: 
N/A (bankruptcy)

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’ 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.

What stands out about General Motors is:

  1. Its high dividend yield of 4.1%
  2. Its low price-to-earnings ratio of 6.3

No, that isn’t a typo.  General Motors has a price-to-earnings ratio of 6.3

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.

Due to the company’s high dividend yield, some investors might be concerned about a high payout ratio. However, the company’s payout ratio is actually quite low, and General Motors’ high yield is caused by their rock-bottom price-to-earnings ratio.

This low payout ratio 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 6.3 is far too low for a company with positive expected growth – especially in today’s overvalued market.

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#1 – Verizon (VZ)

Dividend Yield: 4.7%
Price-to-Earnings Ratio: 
Years of Steady or Rising Dividends: 
Percent of Warren Buffett’s Portfolio: 
0.00% (a very small amount, only 928 shares)
10 Year Earnings-Per-Share Growth Rate: 
4.7% per year

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%.

However, the company accounts for only a minuscule proportion of Berkshire Hathaway’s investment portfolio. Buffett’s company owns 928 shares of Verizon worth about $45,000.

Berkshire Hathaway has been selling their stake in Verizon and I suspect that it might be eliminated completely by the time they file their next 13F. This might be related to the company’s performance.

VZ Consolidated Operating & Financial Summary

Source: Verizon Fourth Quarter Investor Presentation, slide 6

However, the company’s recently poor financial performance does not immediately make it a sell. There any many reasons why Verizon might still be an attractive investment.

First, 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 also benefits from its enormous size, which creates economics of scale. Verizon has a market cap of $206 billion, making it one of the largest publicly traded corporation in the United States (for comparison, AT&T’s market cap is $256 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 also has a well-defined strategy to hopefully restore growth to their business. It is focused on four pillars, displayed for growth.

VZ Strategic Positioning For Growth

Source: Verizon Fourth Quarter Investor Presentation, slide 12

Verizon has also positioned itself for future growth with several recent acquisitions:

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.

Verizon appears undervalued at this time relative to its total return prospects. The company has a price-to-earnings ratio of just 15.4.

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