By H.D. Carver
Beginning with International Business Machines Corp. (IBM), it's fair to say that Warren Buffett is merely increasing Berkshire’s (BRK.A) holdings. Buffett’s been here before. Let’s try to understand why he’s back to the well. This large cap in the technology sector has been a stalwart stock for generations. Trading around $184, which is nearly 15 times earnings, IBM is unquestionably in demand by investors. Boasting a 69.84% return on equity, a dividend yield of 1.60%, a price to book of 9.91 and net income per employee of $35,819, it is not difficult to appreciate the stock’s appeal. Perhaps it has something to do with the “golden cross.” In late September, the 50-day moving average topped the 200-day moving average, generally regarded by “believers” as a signal that the stock has overcome resistance and will continue to appreciate in value. It’s an interesting theory and may have merit. Does Warren subscribe to this school of thought? Who knows! The stock stands quite well on its own merits. Let’s contrast IBM with rival Microsoft Corporation (MSFT), a large cap trading around $26, which is almost 8 times earnings. It also has an exceptional return on equity of 44.16%. The dividend yield is a more generous 2.60%, price to book is a comfortable 3.76 and net income per employee is an unfathomable $260,889. Coincidentally this stock also reached its “golden cross” in late August and has been on either side of the nexus multiple times over the past 2 and one-half months. Nonetheless, it is a great looking stock.
Intel Corporation (INTC) is a newbie to the Berkshire Hathaway family and to my understanding, it is among the first technology stocks to gain that distinction. This large cap is priced at $25, which is almost 11 times earnings. Return on equity is a laudable 27.21% and its price to book of 2.73 puts it in the arena as a value stock. Intel has a dividend yield of 3.20% supported nicely by a 32.00% pay-out ratio. Net income per employee is an impressive $154,667. Unpredictably, this stock also reached its golden cross moment on October 10. Large cap competitor Texas Instruments, Inc. (TXN) trades at $31.15, nearly 13 times earnings. With a strong return on equity of 27.44%, a dividend yield of 1.80% and net income per employee of $99,958, TXN somehow missed the cut with BRK-A. Texas Instrument’s price to book is a secure 3.23 and the beta of 1.16 is a plus. It missed the golden cross test, however, and that could be the reason it was not picked up. Buffett bought 9 million shares worth of Intel.
DIRECTV (DTV), a large cap in the services sector is another Buffett add. The stock is trading around $47, which is 9.29 times earnings. The return on equity is not available but the return on assets is 15.04% and price to book is 12.49. DTV offers no dividend. Net income per employee is $108,190 suggesting a well managed enterprise. Furthermore, this stock has not reached its golden cross, which implies that Buffett is not an advocate of the theory. DTV’s closest competitor is Dish Network Corp. (DISH). This large cap is trading at $24.19 with a price earnings ratio of 7.42. The return on assets is 14.48. Return on equity is another story and price to book is, are you ready? Price to book is 100.33! Dish paid out a one-time dividend on November 15, of 8.50% ($2.00) as a ploy to stop shareholders from jumping ship in the hopes of buying time to pull its act together. Dish has been bleeding customers, losing some 111,000 in the recent quarter. Earlier in the year, Dish purchased bankrupt Blockbuster’s assets as part of its restructuring plan. The combination of these events has eroded shareholder equity. In spite of the troubles, DISH has a net income of $1.46B for the trailing 12 months and each Dish employee contributed $66,364 to the bottom line. Buffett bought 4.2 million shares in the latest quarter, worth approximately $193 million.
Buffett’s next step out of his comfort zone takes the form of General Dynamics Corp. (GD) a large cap in the aerospace and defense industry trading at $65.99. Price earnings are 9.29 and the GD return on equity is a ho-hum 19.69%. Price to book is in value stock territory at 1.71. The company pays a nice dividend of 2.80% and has support from a pay-out ratio of 25%. Net income per employee is $29,778. The “golden cross’ is no where in sight. Lockheed Martin Corporation (LMT) its close competitor in every sense is also a large cap and trades at $77.85, which is also about 9 times earnings. The return on equity is robust at 82.23% and the price to book 8.44. The dividend yield of 3.90% is supported by a pay-out ratio of 36.00%. Net income per employee is 21,363. The “golden cross” is within spitting distance. Both companies are rock solid, however Buffett bought 3 million worth of GD, or approximately $200 million.
We’ll close with CVS Caremark Corporation (CVS), a large cap in the services sector, trading at $38.95. CVS has price earnings of 15.54 and an anemic return on equity of 9.24. Price to book is 1.35. Is there a pattern here? Dividend yield is nominal at 1.30% and the pay-out ratio of 18.00% suggests dividends could easily be higher. Net income per employee is $17,065. Here too, the “golden cross” is very close. Nearest rival Walgreen Co. (WAG), also a large cap in the services sector is trading at $32.55, which is 11 times earnings. Return on equity is solid at 18.56 and price to book is almost predictable at 1.94. Walgreen’s dividend yield is 2.50% supported by a pay-out ratio of 26.00% Net income per employee is $15,398 and the “golden cross’ is still over the horizon. These are both fine companies. Buffett bought 5.6 million shares, an approximately $220 million investment.
So there you have it, Warren’s most extraordinary entrance into the twilight zone. We wish him well and suggest a long position given the analysis above.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.