3 Dividend Stock Favorites of Warren Buffett
Thu, Mar 11, 12:12 PM ET, by Scott V. Nystrom
Risk-averse investors are increasingly turning to stocks that provide a reliable stream of income. Certificates of deposit (CDs) no longer pay high enough interest rates to generate meaningful income. After 2008, many investors no longer want to hold in non-dividend paying stocks for fear of losing principal. More than ever, investors are living by the old adage "the yield is your shield." Investing in stable, mature dividend paying stocks is one conservative approach to portfolio risk management and provides a decent income.
The most popular conservative investing name in the business is Warren Buffett. One way to benefit from Mr. Buffett's approach to investing is to invest in the company he runs, Berkshire Hathaway ((BRK).A) ((BRK).B). But Berkshire does not pay a dividend. So how can a self-directed investor benefit from Buffett's stock picking prowess and earn a reliable income?
In late February, Warren Buffett released Berkshire Hathaway's 2009 annual report and his annual letter to Berkshire shareholders. An approach used by many income investors is to identify the highest yielding dividend paying companies owned by Berkshire Hathaway and spend some time doing due diligence to identify top plays.
The following are three high paying and stable dividend paying stocks held by Berkshire Hathaway that are likely to increase in value over time.
Kraft Foods Inc.
Kraft Foods (KFT) has an above-average annualized dividend yield of 4.0 percent, and a forward price to earnings ratio of 14.1. It is one of the strongest brands in the business. Kraft Foods Inc., and subsidiaries manufacture and market packaged food products including snacks, beverages, confectionary, cheese and dairy products, desserts, frozen pizza, packaged dinners, and processed meats. The firm’s "brands" are common household goods including Oscar Mayer, Oreo, Maxwell House, and Nabisco.
For the quarter ended December 31, 2009, Kraft reported earnings of $710.0 million or 48 cents per share compared with $824.0 million or 55 cents per share for the prior quarter and $101.0 million or 7 cents per share for the same quarter one year ago.
Kraft Foods has a favorable value and growth profile. Kraft continues to expand its global distribution network with the recent acquisition of Cadbury illustrates.
During the last few years, Kraft has been undergoing substantial restructuring efforts to lower the company's cost structure with workforce reductions, consolidation of facilities, dumping less profitable brands, and adding fast growing and profitable goods.
Regardless of where the economy is headed, the company's brand recognition and expansive global distribution network can be expected to generate considerable cash flow into the future.
On a positive note, the Illinois-based company regained coverage by analysts at Credit Suisse with an "Outperform" rating. Credit Suisse also put a $35 price target on Kraft, which had closed at $29.38 on Wednesday, March 10. Sabrient Systems, an independent equity research firm, has a "Buy" rating on Kraft as of March 8, 2010.
The chart below shows solid dividend growth for Kraft Foods over the past 5 years.
The Travelers Companies, Inc
The Travelers Companies, Inc. (TRV) has a 2.5 percent annualized dividend yield and a forward price to earnings ratio of 9.1. Through subsidiaries, Travelers provides commercial, personal property, and casualty insurance products to businesses, government units, associations, and consumers in the United States.
For the quarter ended December 31, 2009, Travelers reported earnings of $1.3 billion or $2.36 per share solidly beating consensus expectations. The company earned $934 million or $1.65 per share for the third quarter of 2009 and $800 million or $1.35 per share for the fourth quarter of 2008. The 2009 earnings were $6.33 per share compared with $4.81 per share for 2008.
Travelers' has a favorable value and growth profile. Travelers has a history of repurchasing shares, most recently in the fourth quarter when it bought back $1.55 billion worth of common stock.
With legacy reserves in asbestos liabilities stable since 2005, the company has put behind it a major drag on the share price. Even better, the company avoided much of the investment leveraging excesses of its peers over the past decade. As a result, Travelers has opportunities to gain market share in underwriting from weaker competitors. Travelers enjoys return on equity higher than its cost of capital since merging with St. Paul Company. In addition, Travelers has a new direct-to-consumer initiative for improving growth in the future.
Sabrient Systems, an independent equity research firm, has a "Strong Buy" rating on The Travelers Company as of March 8, 2010. Travelers was trading at $52.89 a share at the close on Wednesday, March 10.
The chart below shows solid dividend growth for The Travelers Companies over the past 5 years.
Another Buffett high yielder is the international integrated energy company ConocoPhillips (COP), which yields 3.9 percent and has a forward PE of 8.8. The company headquartered in Houston, Texas has been around since 1917, and has raised its dividend every year since the year 2001. Its payout ratio is less than 25 percent.
ConocoPhillips is engaged in the exploration and production of oil and natural gas, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses. The company has six operating units including exploration and production representing 69 percent of earnings, refining and marketing (15%), LUKOIL Investment (11%), midstream (3%), chemicals (1%) and emerging businesses (1%).
For the quarter ended December 31, 2009, ConocoPhillips reported earnings of $1.2 billion or 81 cents per share compared with $1.5 billion or $1.00 per share for the third quarter of 2009. The last twelve months earnings were $3.24 per share compared with $-11.16 per share in 2008.
ConocoPhillips’s strong value profile makes it one of the better dividend paying value stocks available in the market. The company produces a higher proportion of natural gas than competitors and should benefit from the environmental push to shift energy consumption away from coal and oil towards natural gas. Agreements with national oil companies should continue to provide opportunities for revenue growth amid a long-term market that is likely to sustain historically high prices for oil and gas. ConocoPhillips also has significant pipeline operations and other distribution assets that offer steady revenue.
One negative for Warren Buffett fans is Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) has reduced its stake in ConocoPhillips by 34 percent, down to still significant 37.7 million shares.
A risk for ConocoPhillips is the White House budget to Congress for FY 2011 repealed several key tax incentives for the oil industry that has a disproportionate impact on independent, integrated oil and gas producers with large domestic operations. The final decisions have yet to be made by the Congress on the proposal. Investors may want to keep an eye on the proposal as it winds its way through Capitol Hill.
Sabrient Systems, an independent equity research firm, has a "Strong Buy" rating on ConocoPhillips as of March 8, 2010. ConocoPhillips shares were trading at $51.47 per share on Wednesday, March 10.
Though the chart below doesn't show it, ConocoPhillips announced in October 2009 a 6.4 percent increase in the company's quarterly common stock cash dividend—a bullish signal. The new quarterly dividend on the company's common stock went to 50 cents per share, up from 47 cents per share previously.
The chart below shows solid dividend growth for ConocoPhillips over the past 5 years.
As an equally weighted investment bundle, these three companies pay an average annual yield of 3.4 percent and have an average forward price to earnings ratio of 10.7.
The Oracle of Omaha favors high quality dividend paying stocks with a competitive advantage in a stable industry. Companies with a record of increasing their dividends over long periods of time generally qualify as classic value stocks. The three companies listed above meet or exceed these standards and that is why they are in the Berkshire Hathaway portfolio of companies.
Disclosure: No Positions
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