By Andrew Hawkins
It's no surprise Buffett loves dividend kings. He's made a career buying out of favor stocks, then watching shares appreciate and dividends grow. We took a look at The Oracle's portfolio to point out the dividend kings he currently holds. As always, use the list below as a starting point for your own due diligence.
The Coca-Cola Company (KO): Buffett is heavily invested in this global beverage producer and distributor. He currently holds 200 million shares of Coca-Cola, which makes up almost 25% of his portfolio. Coca-Cola sells products in over 200 countries through more than 500 brand names. It also has a market cap of $155.90 billion. The current quarterly dividend is $0.47 and a projected annual dividend yield of 2.7%. Coca-Cola has $12.28 billion in cash and $26.22 billion in total debt. The company has great operating margins at 22.4% and net margins at 31.7%. Coca-Cola has a price to earnings of 13.3 and a history of consistent, increasing dividends. Buffett obviously has faith in this beverage juggernaut.
Coca-Cola had a good first quarter reporting net revenue at $10.5 billion, which is up 40%. Operating income came in at $2.3 billion, up 4%. We think Buffett is happy with the success and distributions of the company. We think that Buffett will continue to maintain his large position in Coca-Cola.
Wells Fargo (WFC): Wells Fargo is another large holding of Mr. Buffett’s. Making up about 20% of Buffett’s portfolio, Wells Fargo is a nationwide bank that offers traditional banking services and products. Buffett currently holds 342 million shares of WFC. Wells Fargo’s quarterly dividend is $0.12, which translates into a 1.7% projected annual dividend yield. Wells Fargo has a market cap of $147.4 billion. The bank has a net margin of 15.3% and a price to earnings ratio of 11.0. Wells Fargo also has a 3 year average revenue growth of 29.3. The company has $165.79 billion in cash and $203.34 billion in debt. This dividend king is a winner and Buffett stands to profit from Wells Fargo’s future success.
Wells Fargo reported a record net income of $3.8 billion. This was a 48% jump from previous year. Earnings per share also rose from same quarter previous year. It came in at $0.67 as opposed to $0.45 in Q1 2010. We think Mr. Buffett will continue to hold his position in Wells Fargo.
American Express (AXP): American Express is the third largest position in Warren Buffett’s portfolio. This credit card company was 12.78% of the Oracle’s portfolio at quarter end. AmEx currently has a quarterly dividend of $0.18 and an annual projected dividend yield of 1.4%. AmEx has a market cap of $65.53 billion. It also has net margins at 15.4% and a price to earnings of 14.4. The company has $22.96 billion in cash and $64.38 billion in debt.
American Express is the dividend king of the major credit card companies. Visa (V) has a quarterly dividend of $0.15 and an annual dividend yield of 0.70%. MasterCard (MA) has a projected yield of 0.2% and a quarterly dividend of $0.15. Discover (DFS) is the closest to Amex with a dividend yield of 0.9% and a quarterly dividend of $0.06. AmEx had a good first quarter with net income rising to $1.177 billion from $885 million from the same quarter previous year. Warren Buffett must think AmEx provides him the exposure to the credit card market he is looking for while lining his portfolio with American Express' nice dividends.
Procter & Gamble (PG): At 8.82% of Mr. Buffett’s portfolio, Procter & Gamble is his fourth largest holding. The company has a market cap of $180.99 billion. Procter & Gamble has a quarterly dividend of $0.525 and a dividend yield of 3.2%. Buffett likes Procter & Gamble because of its high profile brand names and healthy margins. Procter & Gamble operates brand names like Tide, Pantene, Gillette, Cover Girl, Iams, Charmin, and others. The company has net margins of 13.9% and operating margins of 19.2%. The company has a price to earnings of 17 and a forward price to earnings of 15.18. It has $2.95 billion in cash and $31.42 billion in debt. Procter & Gamble has been performing well, but we also think that the company may feel some pressure on margins, as it will suffer from inflation in input costs.
Procter & Gamble saw revenue jump slightly in the first quarter. Revenue was reported as $20.23 billion, up from $19.178 from same quarter of the prior year. Net income also experienced an increase from Q1 2010 to Q1 2011. Net income was $2.873 billion compared to $2.585 billion. We think Buffett values the competitive advantage Procter & Gamble has with such high profile brand names and will continue to hold this position.
Kraft Food Inc. (KFT): Warren Buffett could have dropped this position a year ago when he said he "feels poorer" after the Cadbury acquisition. He publicly stated that he would have voted no for the Kraft takeover of Cadbury. Despite that, Buffett still holds about 105 million shares of Kraft, which makes up about 6% of his portfolio. Kraft has a market cap of $62.4 billion. Its current quarterly dividend yield is $0.29, which produces a projected annual dividend yield of 3.3%. Kraft has an operating margin of 12.1%, which is good, but rising input costs will put pressure on margins moving forward. The company has a price to earnings of 20.6 and has a forward price to earnings of 14.27. Kraft has $2.24 billion in debt and $30.06 billion in total debt.
We think that Kraft is a position that Buffett is vigilantly watching over. We already mentioned the disagreement between Mr. Buffett and Kraft management over the Cadbury acquisition. On top of that, net income dropped $1.084 billion from Q1 2010. Revenue did jump almost $1 billion from same quarter previous year, but more revenue and less net income shows shrinkage of net margins, which is not good.
Johnson & Johnson (JNJ): Johnson & Johnson makes up almost 5% of Mr. Buffett’s portfolio. Although Buffett has decreased his position in Johnson & Johnson since 2008, he still holds over 42.5 million shares in the world’s largest healthcare company. Johnson & Johnson has a market cap of $180.04 billion. It has a quarterly dividend of $0.57 and a projected annual dividend yield of 3.4%. Johnson & Johnson has a price to earnings ratio of 15.2. The company also enjoys healthy margins with operating margins at 26.3% and net margins at 19.8%. Johnson & Johnson has $26.876 billion in cash and $17.83 billion in debt. It also has a payout ratio of 49%.
We think Johnson & Johnson will continue to go after bolt-on acquisitions, after acquiring Mentor, Crucell and now Synthes over the last few years. We applaud these moves, as Johnson & Johnson has a good history of assimilating new blood into its corporate culture. Johnson & Johnson saw revenue grow from $15.631 billion in first quarter 2010 to $16.173 billion in Q1 2011. Despite the jump in sales, fueled by international sales, net income dropped. We think that Buffett has faith that Johnson & Johnson will continue strategic acquisitions and will continue to grow sales.
U.S. Bancorp (USB): This is one investment for which Berkshire shows a paper loss, to date. Still, Warren Buffett is steadfast and owns almost 70 million shares. This makes up about 3.4% of his portfolio. U.S. Bancorp has a market cap of $49.09 billion. U.S. Bancorp has a quarterly dividend of $0.125 and an annual projected yield of 2%. The company has a price to earnings ratio of 13.0 and has a high net margin of 20.3%, compared to an industry average of 6.2%. U.S. Bancorp has $14.97 billion in cash and $63.76 billion in debt.
U.S. Bancorp is one of our favorite banks. However, Wells Fargo has the edge due to its ability to grow its dividend going forward. Wells Fargo recently exited the reverse mortgage business, which we applaud. This left Metlife (MET) the remaining large operator, now that Wells Fargo has figured out that reverse mortgages could saddle the company with a real estate portfolio fit for a REIT.
U.S. Bancorp had a solid first quarter. Earnings per share rose $0.18 from Q1 2010 to Q1 2011. The company also say saw net income jump to $1.046 billion from $669 million. The company is performing well and Warren Buffett will be happy to maintain his position in U.S. Bancorp.
Wal-Mart Stores, Inc. (WMT: This low-cost leader makes up about 3.8% of Warren Buffett’s portfolio. With almost 40 million shares, Mr. Buffett is Wal-Mart believer. The company has a market cap of $187.2 billion. It also has a quarterly dividend of $0.365 and a projected annual dividend yield of 2.7%. Wal-Mart has a price to earnings of 12.6 and an operating margin of 6% and a net margin of 3.9%. It has $9.4 billion in cash and $55.68 billion in debt.
We think Target (TGT) is a better bet than Wal-Mart even though its dividend is less enticing, at 2.4%. We think Target's credit card business is working to its advantage, and Target is eating away at the perception that Wal-Mart is still the low-cost leader. Wal-Mart had an almost stagnant first quarter from last year. Revenue, operating income, and net income were all up but only slightly. We think Buffett still sees a lot of value in Wal-Mart because of its size and distribution network.
ConocoPhillips (COP): ConocoPhillips earned a spot on the dividend king list because it has increased dividends for 11 straight years. Warren Buffett bought a total of around 66 million shares in Q2 and Q3 of 2008. Since then he has been slowly selling off ConocoPhillips until he reached Q2 2010. He has maintained around 29 million shares of ConocoPhillips since Q2 2010. ConocoPhillips makes up about 4.34% of Mr. Buffett's portfolio. The company has a quarterly dividend of $0.66 and a projected annual dividend yield of 3.6%. ConocoPhillips has a price to earnings ratio of 8.9 and has a modest payout ratio of 28%. It has $8.41 billion in cash and $28.05 billion in debt.
We think COP offers a better bet than giants Exxon (XOM), Chevron (CVX), British Petroleum (BP) and Royal Dutch Shell (RDS.A). Congress appears to be looking to "Big Oil" to blame for the U.S.'s woes, and this unpopular industry is an easy target. Conoco is a smaller operation with less production, and may be exempted from new taxes imposed on its larger competitors. It also lacks the baggage and headline risk of Exxon (XOM) and BP (BP) in particular.
ConocoPhillips announced solid first quarter results. Revenue jumped from $45.762 billion in Q1 2010 to $58.247 billion in Q1 2011. ConocoPhillips also experienced a $1.07 billion jump from Q1 2010 to Q1 2011. Mr. Buffett values the smaller size that allows ConocoPhillips to fly under the radar during these turbulent economic and political times. He also values the strong performance and history of ConocoPhillips' dividends.
Perhaps it’s a reflection of the current economic recovery, but these 9 stocks look poised for strong futures. Of course if you really want to invest like Buffett, you could simply take a stake in his company Berkshire Hathaway (BRK.A). Some might complain about Berkshire's lack of a dividend, but others might conclude that Berkshire’s reinvestment policy is like having Buffett as your personal advisor. Whether you invest like Buffett or with Buffett, history says you’re a winner either way.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.