By Abeera Manzoor (Chartered Accountant)
Warren Buffett is the CEO, chairman of the board and one of the largest shareholders of Berkshire Hathaway (BRK.A) (BRK.B). After completing his MBA in 1951 at the age of 21, he worked at different styles of investment firms. These days, Buffet is known more for his concentration on the insurance business. These businesses are usually steady and predictable, and generate a decent annual cash flow in any economic environment. Buffett joined Berkshire in 1965, and by 1990, had entered into the billionaire's club. By 2008, he was the richest man in the globe, with $62 billion in assets.
It's a common strategy among investors to favor stocks that are or were, for a time, undervalued but have upside potential. These they hold until the market eventually starts to favor them again, in order to reach their fair value. Buffett, on the other hand, isn't worried with the supply and demand ins and outs of the stock market. In fact, Buffett displays no anxiety about the behavior of the stock market at all. Instead, his philosophy is that in the short run, the market is a popularity contest while in the long run, it is a weighing machine. In short, he thinks like a dividend investor.
Buffett's strategy is to look for stocks with strong business models, and high overall potential as companies. He hold them for a long-term play while seeking a constant stream of income from their dividends, combined with the capital gains these quality stocks offer. Buffett takes ownership in quality companies well capable of generating strong top and bottom line growth, and with a potential to generate massive cash flows. He invests in companies that can make money as businesses, and that are fairly well-insulated from new competition or technological obsolescence.
Using this strategy, Berkshire Hathaway shares rose an impressive by 42% from 2007 to 2011 when the S&P 500 lost 1% of its value. Buffett's portfolio has outperformed the S&P 500 in 24 out of the past 30 years. In that time, he has garnered an 18% annualized return, compared to an 11% annualized return for the S&P 500.
Buffett's recent filing with the SEC reaffirms his successful image. Berkshire Hathaway has not initiated a new position in any company. Instead, they raised their stake in six stocks that are offering dividend growth potential with steady capital gains. These are Suncor Energy (SU), Verisign (VRSN), Exxon Mobil (XOM), US Bancorp (USB), The Bank of New York Mellon Corporation (BK) and DaVita, Inc (DVA). Its portfolio is heavy on those industries that offer companies to generate both top and bottom line growth, but is well diversified, mainly focused on financial (40.1%), consumer goods (22.8%), technology (16.7%) and services (7.3%) companies. Its biggest investments include some of the most popular blue chips known to Wall Street. Here's a look at Berkshire's top eight stocks.
Percent of Portfolio
The Annual Dividend
Wells Fargo & Company
International Business Machine
American Express Company
Exxon Mobil Corp
These top picks are safe for investors and offer healthy returns. Below, I discuss Buffet's top two picks-the two I like the most for dividend investors. These are Coca Cola (KO) Company and Procter & Gamble (PG). I strongly believe that these two stocks have the ability to sustain returns for investors.
How Coca-Cola is a Safe Investment
Coca-Cola is generating strong results within the confines of a challenging macroeconomic environment driven mainly by rising volatility across emerging markets. The company is growing its global volume and continues to expand worldwide value share in total nonalcoholic, ready to drink beverages due to the strength of its portfolio, the diversity of its global footprint and focus on marketplace execution. Together with its global bottling partners, it is investing in its brands and capabilities to strengthen its system and to drive sustainable growth and value.
With this strategy, Coca-Cola has been showing significant returns to investors in the form of dividends, buyback and price appreciation. The company has consistently increased its dividend over the past few decades. At the moment, its payout ratio of 56% is not only sustainable, but also offers room for future increases. Further, its strong top and bottom line enables it to generate significant cash flows and its very high price to cash flow ratio of 17.4 demonstrates a similar trend. In the TTM, its operating cash flows are standing at $10.5 billion, and free cash flows are at $8.4 billon. The company's dividend payments are only at $4.7 billion, and are completely protected by free cash flows. With such a massive amount of free cash flows, Coca-Cola is also working to reduce share count, which is a further enhancing dividend payment.
How Procter & Gamble is a Safe Investment
PG a global leader in retail goods, offering branded consumer packaged goods of higher quality to consumers all over the world. Its products are available to end consumers in over 180 countries and territories through mass merchandisers, drug stores, grocery stores membership club stores, department stores, high-frequency stores and distributors. PG is aggressively seeking opportunities in new growth markets and continues to expand its presence in other channels, such as ecommerce and perfumeries. To boot, this giant has on-the-ground operations in around 70 countries. The company operates in five reportable business segments: beauty, grooming, health care, fabric and home care, and finally, baby, feminine and family care.
With a solid brand and product innovation, as well as effective sales, advertising and marketing programs, PG has been generating both top and bottom line growth. In the recent quarter, it has grown top line by 2%, while the bottom line growth was at 8%, representing strong margin expansion. What's more, the company's consistent growth in net income is enhancing its potential to generate healthy cash flows. PG has been generating massive operating and free cash flows to cover dividend payments and buybacks, as well as for investment in growth opportunities. In TTM, it has generated free cash flows of $10 billion, while dividend payments are at $6.6 billion. PG's cash generating potential has led it to make huge increases in dividends over the decades. At present, it offers a quarterly dividend of 0.6015 cents/share, which looks completely safe.
Buffett's investing style is remarkably safe and worthy of being adopted by conservative and dividend investors. I personally recommend his book, The Warren Buffett Way, to those who are serious about the stock market or retirement, or those who simply work too hard to let their money be lazy.