By Eli Inkrot
A lot of people like to jump on the Warren Buffett bandwagon -- after all, it’s hard to knock a billionaire’s path regardless of how he got there. From an investor’s prospective, the legwork has already been done: The Oracle of Omaha likes strong, fundamental businesses with good managers that consistently provide lasting profits as a result of their intimidating economic moats. Problem is, the path to success has already been paved and as Buffett oft quips “In the business world, the rearview mirror is always clearer than the windshield.”
Sure you could make some Buffett buys after the Berkshire (BRK.A) statements are released months later, but you’re often going to be late to party. A seemingly more intuitive way to follow Buffett would be to track his holdings and find entry points that resemble the price he paid. But hold on to your hat, this could be just as dangerous as blindly following his quarterly delayed buys. It is both fundamental and essential to consider Finance 101, the time value of money along with the impact of dividends. Let’s browse through some of Warren’s top holdings.
Perhaps most to this point is Houston-based oil giant ConocoPhillips (COP). A quick look to Berkshire Hathaway’s 2010 annual letter shows a cost basis of about $69.67 a share on his more than 29 million shares. Today, COP trades at just over $64 a share; it’s a buy! Well, not quite yet. Berkshire has held the same 29 million shares since at least late 2008 and in that time has accumulated $6.04 a share in dividends. This brings the cost basis down to $63.63 a share even without accounting for the time value of money. After-all I’d much rather have $64 dollars 3 years ago than $64 dollars today. Still, at today’s price COP does appear to be within a reasonable range of Buffett’s cost basis. Further, today’s current yield is 4.1% compared with the yield in January 2009 of 3.3%. Over the years Buffett has reduced his stake in COP from a peak of 84 million shares, but 29 million is still a healthy slice. Income investors have something to be excited about as well as ConocoPhillips has not only paid, but also increased its dividend for the last 11 years at a 10-year average growth rate of about 12%. Today, COP might be one of the best opportunities to get a Buffett Buy at a near Buffett Price.
Next let’s move on to the New Jersey-based Healthcare behemoth Johnson & Johnson (JNJ). As of late JNJ has been bogged down with recall worries, but that hasn’t really affected profitability or a recent string of earnings beats. A typical Buffett Buy, Berkshire has owned at least 45 million shares since late 2007. A quick glance at the current price around $63 and Berkshire’s cost basis of $61.06 suggest Buffett believers could be looking to pull the trigger soon. But we know the rest of this story as dividends and TVM say not yet. Since 2008 JNJ has paid out $7.52 a share in dividends, bringing Berkshire’s cost basis down to $53.54; even without considering the time value of money. Additionally, Buffett has reduced the JNJ stake from a peak of about 64 million shares. Despite not being able to get the Buffett Price, Johnson & Johnson is still well worth a look. In January of 2008 the dividend yield was 2.4% as compared with today’s juiced up 3.6% current yield. Also, if you want to talk about payout consistency I would imagine JNJ’s 49-year streak of increasing dividends would do the trick. The payout ratio is more than sustainable coming in at around 50%, while the dividend growth rate has slowed as of late to the high single digits, it still crushes inflation. Why not buy JNJ now and cheer it on to an 50th Anniversary dividend increase?
Kraft (KFT) is the cheesiest, although maybe not in Buffett’s mind. His Berkshire Hathaway once held 124 million shares, but has since reduced that number to today’s 97 million. His public disapproval of KFT was news, but his remaining confidence can be inferred as this Illinois-based major diversified foods company makes up his 5th largest holding. Berkshire’s late 2007 cost basis of $32.99 a share is similar to today’s price of $33.76, but add in accumulated dividends of $4.60 and the gap grows larger. So far the theme has been see a Buffett Price - not really a Buffett Price - but buy it anyway. Kraft might break the mold with its current dividend yield of 3.4% being quite close to its January 2008 yield of 3.3%. More frightening is the recent 13 quarter dividend freeze, suggesting Buffett might have been right. Add in a 67% payout ratio and investors might want to hold their noses before they slice into Kraft.
At $53.70 a share, investors have a hard decision: a week’s worth of groceries at Wal-Mart (WMT) or one share of its stock. Berkshire has held about 39 million shares of this small nation Arkansas-based discount store since late 2009, with a cost basis of $48.49 a share. Dividends have accumulated to $2.31 since 2010. Despite the price run-up current yield has made major plays in a short amount of time moving from a yield of 1.66% in January of 2010 to today’s current yield of 2.7%. A Buffett Price isn’t inconceivable given the volatility of today’s markets, but even without it WMT could be a strong dividend play for the future. Wal-Mart has not only paid but also increased dividends for the last 37 years and looks to do it again this March. True, the 2.7% current yield could be below many income investors’ required thresholds, but WMT has recently been ramping up its dividend policy. Dividends have grown at an astounding 10-year average growth rate of almost 18%. Even with a more conservative 10% growth rate going forward your yield on cost could jump from today’s 2.7% to over 10% in about 14 years. Reasonable, given WMT’s low 30% payout ratio.
So far we’ve learned that even if a Buffett Buy looks close to a Buffett Price, it is first necessary to consider time and dividends. The first four stocks appeared close in price, but were really further away when reviewed more carefully. Still these stocks can still be poised to provide long-term value. Let’s now look at some Buffett Buys no where near Buffett Prices.
Perhaps Buffett’s favorite stock and beverage, Atlanta-based Coca-Cola (KO) has been a knock out for some time now. Today Berkshire owns 200 million shares at a cost basis of $6.50 a share; making up his largest portfolio position. If you want to wait for a Buffett Price on this one… don’t wait for a Buffett Price on this one. Berkshire began accumulating KO in the early 1990s and ended up with about 9% of the company by the mid-1990s. Since 1997 Berkshire has collected $15.93 a share in dividends alone, almost two and a half times what he paid. With today’s current dividend at $1.88, his yield on cost is an incredible 29%! Imagine an investment that pays you back nearly a third of your initial cost basis every year. Even though you’re not going to get a Buffett Price, Coca-Cola is definitely worth a look for other Buffett reasons. Warren was once quoted: “If you gave me $100 Billion and said ‘take away the soft drink leadership from Coke in the world’ I would hand it back to you and say ‘it can’t be done.’” Today that number would be closer to $150 Billion, but the point is that KO sells more than sugary beverages, it sells moments of happiness that are difficult if not impossible to replicate. Much like JNJ, Coca-Cola has increased its dividend for 49 straight years and looks to make it 50 next year. The payout ratio around 35% appears more than sustainable while yield on cost has been increasing by an average of 10% over the last 10 years. With a current yield of 2.9% and a modest dividend growth rate over 7% KO could be turning out 6% in just 10 years. For Buffett, that means a 50% yield on cost in just 8 years and a 100% yield on cost in about 18 years. Imagine an investment that repays its principal every year.
What KO has been doing with non-alcoholic beverages, Cincinnati-based Procter & Gamble (PG) has been doing with consumer goods for even longer. Buffett backed into this stock through his Gillette holdings, but that doesn’t mean it hasn’t been profitable. Berkshire holds about 73 million shares with a cost basis of $6.32 a share as compared with PG’s current price of $63.91. Since 2006 dividends have accumulated to $9.26 representing a huge payoff. Today’s investor can’t get the Buffett Price or his 33% yield on cost, but can buy into a company with a 3.3% current yield and a 55-year streak of increasing dividends; the 6th longest active streak. From a sustainability standpoint the payouts look safe with a payout ratio near 50%. Further, dividends have been growing by an average of about 11% over the last 10 years. At that pace, the current yield would balloon to a 10% yield on cost in about 11 more years. Choose PG or KO, if the past half century is any indicator, you’ll be happy.
Try buying a share of New-York-based credit card giant American Express (AXP) for $8.49 and you won’t buy anything. Buffett was able to do it with his 151 million shares back in 2000 and earlier, but today’s going rate is closer to $43. Much like his Coca-Cola and Proctor & Gamble acquisitions, AXP was acquired over a couple of years and has now paid him more in dividends than it originally cost him. Since 2001 AXP has paid out $11.92 a share in dividends, thanks in large part to a very generous $7.16 special dividend in October of 2005. With the current $0.72 annual payout, Buffett now enjoys an 8.5% yield on cost. For today’s buyer it’s more like 1.7%, assuredly low for many income investors. To compound the current yield issue, AXP’s dividend has been stagnant as of late as it has been held at $0.18 for the last 16 quarters. Low current yield and no growth: doesn’t sound overly appetizing. But to be fair, AXP’s payout ratio is quite low coming in at 20%. If investors become too unhappy, they could clamor for a higher payout; a modest move to a 50% payout ratio would result in a more acceptable yield over 4%. Even without a payout ratio increase, future dividend increases might be on their way as Banks tally on the debit card fees and consumers flock to AXP plastic.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.