Warren Buffett has commonly said that the key to an investor’s success will be determined by his or her ability to identify a good business and own it for a prolonged period of time. Surely, one mark of a good business is its ability to pay shareholders a dividend. This is especially true if the business can increase this payout over a multiyear period. Among other businesses, Mr. Buffett has described Coca Cola (KO), Wal-Mart (WMT) and Procter and Gamble (PG) as supreme dividend payers and good businesses. This article reveals the high dividend-paying businesses of which Mr. Buffett is most fond, as indicated by the size and duration of his stake in them.
M&T Bank Corporation (MTB) is a strong financial institution that is currently trading on the cheap. Warren Buffett initially bought a stake in the company in the early 1990s, but has increased his position since to a current 5.3 million shares. He currently owns about 6% of the bank. MTB operates in the Northeast United States with over 700 banking offices. It pays a 3.9% dividend and is earning cash for its shareholders. It earns $6.91 and trades at 10 times earnings. These are promising numbers for a sizeable bank.
MTB has made a name for itself as a reliable banking partner for small businesses in the Northeast United States. Its quarterly revenue increased more than 20%, a prospect that sets it apart from its competitors in huge ways. PNC Financial Services (PNC), another regional competitor of MTB, reported negative earnings growth of 24%. KeyCorp (KEY) is another usual competitor of MTB, but it pays a 1.6% dividend. I like Mr. Buffett’s stamp of approval on MTB.
In 2008 Warren Buffett invested $3 billion of preferred shares in General Electric Company (GE). Shares of GE have tanked since the financial crisis, and it has not recovered. It trades at 12 times earnings and pays a 3.7% dividend, a rate nearly twice that of the 10-year U.S. Treasury bond. GE is a better buy than United Technologies Corporation (UTX), a competing business that pays a healthy dividend but is priced more expensively. We’re looking for bargains, and GE is cheap.
Here’s the deal: GE is a great business and it is undervalued. But we (at least I) cannot get the same deal with GE as Mr. Buffett. When GE was briefly strapped for cash, the Oracle of Omaha was more than happy to inject Berkshire’s capital with very favorable terms. He was paid a 10% dividend while GE put the cash to work, and Mr. Buffett eventually made $1.2 billion on the deal. This was a one of a kind investment that only Mr. Buffett could manage.
Johnson and Johnson (JNJ) is a business that provides great services and products to consumers worldwide, and it is growing its business. Mr. Buffett has owned shares of JNJ for a long time, and his position in this business represents about 5% of his total equity holdings. Additionally, Mr. Buffett has added to this position over the last year. Mr. Buffett has mentioned that JNJ is a business capable of generating cash for its shareholders over a long period of time.
JNJ will sustain its competitive advantage in the world. Year over year JNJ earnings have grown 6.8%. It pays a 3.6% dividend and has a higher operating margin than any of its major competitors. Abbott Laboratories (ABT) employs nearly as many people as JNJ, so its costs may be higher (proportionately), but it does not earn as much cash for its shareholders as does JNJ. Further, I’d buy JNJ over Covidien (COV) – based in Ireland – for innumerable reasons. There exist too many risks in the eurozone to make any sort of bet on COV.
Let’s move on to another Buffett favorite: Procter and Gamble (PG). If you own PG you can’t tell anybody about your hot stock tip at a cocktail party. But you can count on a steady dividend stream from one of the world’s best businesses. Warren Buffett understands this, and he has an enormous position in the company. After the purchase of Gillette, Mr. Buffett’s stake in PG rose to about 2.6% of the total shares outstanding. PG pays a 3.3% dividend and currently sells at 16 times earnings. Procter and Gamble is a proud dividend aristocrat, and it fosters a culture of returning equity to shareholders. It is a very safe bet.
Executives at PG are also consistently aware of its share price, and work hard to create a business that supports the price at a sustainable level. Many of the executives, directors, and employees have retirement packages that are weighted heavily with PG stock. PG won’t ever shoot the lights out, but it is steady as a rock. Over the long term, PG is better positioned to earn for its shareholders than competitor Kimberly Clark (KMB). In its most recent annual report, PG reported that, despite this period of rising costs, diluted earnings per share increased 1%. KMB quarterly earnings decreased 8%.
Kraft Foods Inc (KFT) has a tremendous global presence and a positive ability to increase its sales over a period of time. It pays a 3.3% dividend and its quarterly earnings have grown 22%. Mr. Buffett acquired an 8.6% stake in KFT in 2008, but has since reduced the position slightly. KFT has experienced difficulty in the past, and Mr. Buffett publicly criticized the expensive purchase of Cadbury Schweppes. However, the future for KFT is bright, and the prospect of spinning of components of its business could yield major benefits to investors. But KFT will continue to grow its business and sell its packaged foods for years to come. And after a decade in which shares of KFT traded along a flat line, I am inclined to believe in the potential upside of the stock.
The inclusion of Kraft in Buffett's portfolio warrants a review of another food company, Nestle (NSRGY.PK), which has an extremely strong stable of brands that Buffett has shown an appetite for in the past. Kit-Kat, Butterfinger, Hot Pockets, Lean Cuisine, and Haagen Dazs are among the recognizable products under the Nestle fold. NSRGY.PK is a Swiss company, so uncovering financial statements can be a chore. Shares have traded down in recent months in lockstep with the tumultuous news out of Europe. It’s your job to buy when everyone else thinks the sky is falling.
Buy these businesses on one of these predictable days when Europe seems to remind the world that it is fiscally disrupted and politically dysfunctional, and the Dow closes down significantly. Over the long term, these cash generating businesses of America will survive, and grow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.