"Rule number one is never lose money. Rule number two is never forget rule number one," says Warren Buffett. He's not just blowing hot air, either.
For proof, look no further than the performance of his holding company, Berkshire Hathaway (BRK.A), (BRK.B). With Buffett at the helm, Berkshire shares outperformed the S&P 500 60 times between 1965 and 2005. No wonder why when Buffett makes a move on a stock, the world watches. Of course, I'm not just waxing on about Buffett's greatness. (There's enough nauseating hero-worship out there as it is.)
Instead, it just so happens that Buffett gravitates toward exactly the kind of stocks that interest me most. Namely, dividend payers. And given his knack for identifying underappreciated equities, whenever he initiates a new position, it gives me more than enough excuse to take a cold, hard look at whether it makes sense to follow suit. Well, there's a new holding in the Berkshire vault. And it came out of left field.
Squeezing Cash From the Oil Sands
According to an SEC filing released last week, as of June 30, Warren Buffett had piled into 17.8 million shares - more than $500 million worth - of the exploration and production (E&P) company, Suncor Energy (SU). Buffett isn't alone in his love for the company, either. BP Capital Management, the hedge fund chaired by T. Boone Pickens, also has a large position in Suncor (the fourth largest in its portfolio, in fact).
But like I said last week, just because insiders and hedge funds have an edge when it comes to picking stocks, that's still no reason to follow them blindly. Carrying out your own analysis is key.
In effect, when you invest in Suncor, you're betting on the Alberta oil sands - the third-largest proven crude oil reserve in the world, outsized only by Saudi Arabia and Venezuela. Now, despite the air of uncertainty that surrounds E&P operations, Suncor has managed to consistently outperform the industry.
Since the revelation that Berkshire placed its mammoth, half-billion-dollar bet, Suncor's share price has gapped up 4.37%. If that doesn't seem substantial, just consider the fact that shares are up only 4.5% year-to-date and 9% over the last three months. Compare that, as well, to the oil and gas industry at large, which according to Morningstar is down 2.35% and 1.28% over the same respective periods.
Still, the price appreciation is tepid, to be sure. But what Suncor lacks in equity growth, it more than makes up for in aggressive dividend growth.
More Dividend Growth on the Way
Over the last five years, Suncor has increased its payouts 21.27% on average. All the while, its dividend payout ratio remains on the low end, clocking in at just 32.2% on a trailing twelve-month basis. Translation? There's a heck of a lot more room to run for Suncor's dividends before earnings begin putting the squeeze on increases.
This also means that its middling yield of 2.27% presents an excellent opportunity to take advantage of yield-on-cost. Like I've said before, this is the ultimate number in dividend investing. Put simply, it's an astoundingly profitable way to trade up the short-term advantages of initial yield for the long-term advantages of dividend growth.
Better still, considering the recent insider attention, Suncor is currently trading for a reasonable 19 times earnings. (As a rule of thumb, I never recommend buying up income investments that trade over a price-to-earnings ratio of 20.)
Bottom line: It's never worth blindly following other investors, no matter how much of an icon they've become. Nonetheless, in the end, Buffett has landed on a stock with excellent dividend growth potential, stable performance and a reasonable valuation, to boot.