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  • Warren Buffett Keeps Betting On Stable Dividend Giants  0 comments
    Feb 18, 2014 2:11 PM | about stocks: BRK.A, BRK.B, GE, WFC, WMT, XOM

    Warren Buffett is the CEO, chairman of the board and one of the largest shareholders of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). After completing his MBA in 1951 at the age of 21, he worked at various investment firms. These days, Buffet is known more for his concentration on insurance businesses. 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. Buffett thinks like a dividend investor.

    Buffett's strategy is to look for stocks with strong business models, and high overall potential as companies. He holds them for the long-term 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 the 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 initiated a new position in three companies and also sold out three: The Washington Post Company (WPO), DISH NETWORK CORPORATION (NASDAQ:DISH), and GlaxoSmithKline PLC (NYSE:GSK). He raised their stakes in seven stocks, and most of them are offering dividend growth potential with steady capital gains, including Wells Fargo (NYSE:WFC), Exxon Mobil (NYSE:XOM), Wal-Mart (NYSE:WMT) and General Electric (NYSE:GE). This portfolio is heavy on those industries with companies that offer to generate both top and bottom line growth, but are also well diversified, and this portfolio is mainly focused on financial (42%), consumer goods (21.8%), technology (15.2%) and services (6.1%) companies. The biggest investments include some of the most popular blue chips known to Wall Street. Here's a look at Berkshire's top eight stocks:

    Stock

    Shares Held

    Percent of Portfolio

    Dividend Yield

    The Annual Dividend

    Wells Fargo & Company

    463,131,623

    20.7

    2.60%

    $1.20

    Coca-Cola Company

    400,000,000

    15.76

    2.88%

    $1.12

    International Business Machine

    68,121,984

    12.19

    2.07%

    $3.8

    American Express Company

    151,610,700

    13.12

    1.00%

    $0.92

    PG

    52,793,078

    4.10

    3.03%

    $2.406

    Wal-Mart

    49,247,235

    3.71

    2.48%

    $1.88

    Exxon Mobil Corp

    40,089,371

    3.97

    2.68%

    $2.52

    US Bancorp

    79,117,501

    3.06

    2.18%

    $0.92

    From WhaleWisdom.com

    These top picks are safe for investors and offer healthy returns. Below, I discuss Buffet's top two picks in the recent quarter-they are the two I like the most for dividend investors. These are Wells Fargo & Company and General Electric. He has increased a stake in Wells Fargo by adding additional 0.32 million shares while he showed significant trust in the General Electric's strength by increasing shares to 10 million. I strongly believe that these two stocks have the ability to sustain returns for investors.

    How Wells Fargo & Company is a Safe Investment

    Wells Fargo & Company is a nationwide, diversified, community-based financial services company. They provide investments, banking, insurance, mortgage, and consumer and commercial finance through over 9,000 stores and 12,000 ATMs, as well as online. The company seeks to satisfy all its customers' financial needs and to help them succeed financially.

    To accomplish this vision, the Wells Fargo's business strategy is to increase the number of its financial products so that customers' needs are anticipated and fulfilled. Its cross-sell strategy, diversified business model, and the breadth of its geographic reach help growth in both strong and feeble economic environments. In addition to expanding its product line, Wells Fargo is constantly grabbing opportunities to grow by gaining new customers in extended markets and increasing market share in many businesses. These successful strategies continue to help solidify the company's position as a leader in the financial services sector.

    With a diversified business model, the company had generated outstanding growth in 2013, including strong growth in deposits and loans, and double-digit growth in earnings. At the end of the full year, it has generated earnings of $21.9 billion. Net income and diluted earnings per share increased at a double-digit rate of 16% compared with the past year. Further, the recent quarter was the company's 16th successive quarter of EPS growth. With such record top and bottom line growth, its cash-generating potential is also expanding. Consequently, the company has been able to increase dividends by 500 times over the past five years. Still, its payout ratio of only 28% is offering a lot of room to make further increases in dividends. Its cash flows demonstrate a similar trend. In TTM, its free cash flows are at $8.8 billion while dividend payments account for only at $6.4 billion. This allows Wells Fargo to not only make more dividend payments but also offers room to aggressively work on a buyback program and to invest in growth opportunities. Wells Fargo is well-set to generate big profits in 2014 with strong earnings generating power and capital levels, and a better overall economic outlook.

    How General Electric is a Safe Investment

    General Electric provides expertise, capital and infrastructure for a world economy. The company builds lighting, appliances, power systems and many other products that help people to build homes, factories, offices and retail facilities. GE also offers financing services to businesses and consumers to build their financial futures. After experiencing a huge collapse in business model during the depression that began in 2007, GE started to restructure its business and began to strengthen its core while reducing its dependency on GE Capital. The company started to spend more on research to protect its brand while looking to capture new markets in China, India, Brazil, Australia and other locations. In order to focus more on its core business, the company started to make acquisitions and dispositions of assets. During this process, the company made many acquisitions including Avio Aero and Lufkin Industries, a leading supplier of artificial lift technologies, and forged a partnership with XD Electric Group in China to provide high voltage transmission and grid automation equipment and services. In other news, it is looking to reduce financial sales to 30% of sales overall.

    These years of effort have started to show results. At the end of fiscal 2013, the company generated strong operating performance by taking $1.6 billion of cost out, growing operating earnings by 9%, reducing the size of GE Capital, and returning more than $18 billion to shareholders in the form of buy-backs and dividends. In 2014, the company continues to strengthen its balance sheet, reducing non-core assets while adding new innovations to its portfolio and working on cost-out efforts to the tune of more than $1 billion. The company is also paying consistently increasing dividends which have the complete protection of free cash flows.

    Conclusion

    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.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: BRK.A, BRK.B, GE, WFC, WMT, XOM
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