Warren Buffett is a household name. Whether people know him as the “Sage of Omaha” or the “Oracle of Omaha,” it seems everyone knows about Warren Buffett, and why shouldn’t they? He is the most successful investor in history. His Berkshire Hathaway has a 30-year cumulative return of 23,730.4%, more than 10 times the market’s 2028.6%. Buffett has a simple formula for picking his stocks: "We want businesses to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price."
To get an idea what Buffett is buying, I developed a list of the top-yielding stocks in his portfolio. Each company in this analysis has a dividend yield over 3.5%.
Johnson & Johnson (NYSE:JNJ) is a company involved in the development, manufacture and sale of healthcare products. JNJ has a product range that includes baby care, skin care, oral care, wound care, and the women's healthcare fields, as well as nutritional, over-the-counter pharmaceutical products, and wellness and prevention. JNJ is Buffett’s largest position of the stocks in our analysis. He holds over 4% of his portfolio in the company, making it his seventh largest position. JNJ also has the lowest yield of the stocks in our analysis, coming in at just 3.5%. Buffett has owned some position in the company for many years. Over the last five years, his stake in the company has ranged from 23.9M to 61.7M shares. As of the end of third-quarter 2011, Buffett owned 37.4M shares in the company. JNJ was trading at $64.72 at the close of business on November 30, with a one-year target estimate of $72.69. That, combined with its $2.28 dividend and the fact that many JNJ products are household staples makes JNJ a good inflation-proof bet. Point in fact, the company has a beta of just 0.56, meaning it is roughly half as volatile as the market at large.
ConocoPhillips (NYSE:COP) is a worldwide integrated energy company. It provides a huge range of crude oil and petroleum products, as well as natural gas and petrochemicals. COP has the next highest dividend yield of the stocks in our analysis, offering investors 3.7%, or $2.64 a share. Buffett has more than 3% of his portfolio invested in COP, making it the ninth largest position in his portfolio. As of the end of business November 30, COP was trading at $71.32 with a target estimate of $79.18. COP is slightly more volatile than the market, with a beta of 1.06, but I like it. For the foreseeable future at least, COP provides the materials the world needs to run. Moreover, in comparison with competitors BP Plc (NYSE:BP), Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM), COP has stronger quarterly growth (35.70% vs. BP at 35.10%, XOM at 31.5% or CVX at 26.2%). COP also has big plans. Next year, the company will be splitting into two segments – one for exploration and production and the other for refining and marketing. I believe narrowing the range of focus in this way has strong upside potential.
General Electric (NYSE:GE) provides a mixed lot of technology, service and finance services worldwide. The idea is basically that GE develops and manufactures equipment. Since this equipment is highly specialized and expensive, it provides servicing as well as financing. GE also leverages its know-how toward home and business solutions, such as air conditioners, refrigerators, washers and dryers, etc. Similarly, it exploited its know-how in finance to expand into home loans, credit cards and other household finance services from its commercial financing. In other words, GE has created an ecosystem that plays on its strengths. Buffett had 7,777,900 shares in the company at the end of September. As of the end of November, GE was trading at $15.91 a share. It has a one-year target estimate of $20.93 and pays a 60 cents per share dividend (roughly 4% of its current price). Given the nature of its business, GE has a high beta of 1.92. After all, it sells products that are largely optional. Businesses can generally make an old piece of machinery work a little longer, until cash flow or revenue are up, just like a household can make do with a “moody” appliance until money is up. As such, I like GE as a long position. The market is too volatile right now to look to GE as a fast play, but, with its dividend and strong outlook, this is a company that will definitely be profitable, just maybe not so much in the short-term as long as the economy stays like it is.
M&T Bank (NYSE:MTB) is a mid-sized banking chain focused on small and mid-size regional markets. It mainly provides services in the Northeast and Mid-Atlantic but it also has a small presence in Canada, and the Cayman Islands. As of December 31, 2009, it had 738 banking offices going into the latest quarter. It also boasted a commercial banking office in Ontario, and an office in the Cayman Islands. Warren Buffett owned 5,382,040 shares in the company at the end of the third quarter. MTB was trading at $72.98 a share at the end of November, with a one-year target estimate of $84.20 and a $2.80 dividend (yield 4.10%). MTB is only slightly more volatile than the market at a beta of 1.14. This is reasonable given the nature of its business. In contrast, competitor PNC Financial Services Group Inc. (NYSE:PNC) has a beta of 1.63. MTB also has higher quarterly growth than PNC (20.9% vs. PNC’s 5.40%). I like MTB and see a strong potential for growth going forward, but not at its current price. I would recommend the stock at $68, but at $72.98 a share, the risk is too great for the amount of growth expected and the probability MTB will make the mark.
Sanofi Aventis (NYSE:SNY) is a pharmaceutical company. It develops, manufactures and distributes prescription drugs as well as a range of OTC drugs, generics, vaccines and animal health products. It has a strategic alliance with Regulus Therapeutics for the development of micro-RNA therapeutics, such as those used in the treatment of fibrosis. Warren Buffett owned 4,063,675 shares in the company at the end of the third quarter. SNY was trading at $35.01 at the end of trading on November 30, with a one-year target estimate of $43.72 and a $1.32 dividend (3.90% yield). Compared with competitors like Merck & Co (NYSE:MRK), SNY has higher quarterly growth (11.10% vs. MRK’s 8.10%) and higher net income ($6.25B vs. MRK’s $4.22B) in spite of having a smaller market cap ($93.98B vs. MRK’s $108.96B). I really like SNY. I like its growth, its dividend and its secs. The stock is also a favorite pick of Jim Cramer, the host of “Mad Money.”
GlaxoSmithKline (NYSE:GSK) is also a pharmaceutical company. In addition to prescription drugs, GSK also makes a range of OTC products, like oral care, nutritional health, heart burn medicine, weight loss products and cigarette cessation tools. Warren Buffett had 1,510,500 shares in the company at the end of the third quarter. As of the close of trading on November 30, GSK was trading at $44.49 with a one-year target estimate of $49.58. The expected growth may not be a show stopper but its dividend is. The company pays out $2.17, or a 5.10% yield. In this case, I have to disagree with Buffett. GSK just isn’t as strong as its competitors. It has much less quarterly growth than Novartis (NYSE:NVS) or Pfizer (NYSE:PFE) (4.30% vs NVS’s 17.30% or PFE’s 7.50%). Also, in spite of having a larger market cap ($221.61B) than NVS ($133.17B) or PFE ($154.75B), it brings in less revenue ($43.09B vs. NVS’s $58.84B or PFE’s $68.78B). GSK could be a good long play, but for the money why not go where there is more upside? That said, for investors that already hold GSK, I do not recommend selling.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.