Warren Buffett's Top Dividend Stocks: 3 To Buy, 2 To Avoid

Includes: GD, INTC, JNJ, MDLZ, PG
by: Rash Menaria

The following is a list of some of the Warren Buffett's top holdings with good dividend yield.

Company Name


Shares Held - 12/31/2011

Dividend Yield

Payout Ratio

Kraft Foods Inc





Intel Corporation





Johnson & Johnson





Procter & Gamble Company





General Dynamics Corporation





Source: 13F filing

I like Kraft Foods, Intel and Johnson & Johnson among the above stocks. However, I would recommend avoiding Proctor & Gamble and General Dynamics.

Kraft Foods is my favorite stock in the above list. Kraft manufactures and markets packaged food products, including biscuits, confectionery, beverages, cheese, convenient meals and various packaged grocery products. Kraft is trading at a forward PE of 15x. Its EPS forecast for the current year is 2.28 and next year is 2.52. According to the consensus estimates, Kraft's top line is expected to grow 10.50% in the current year and 2.60% next year.

Trading at a forward PE of 15, Kraft's valuations are in line with its peers despite its above-average growth rate. I believe this will change going forward, as Kraft is planning to split up its high-growth Snacks business and the stable return of Grocery business in FY12. This will highlight the above peer growth profile of the global snacks business and hence, help the company achieve a better valuation.

Intel is the world's largest supplier of semiconductor chips. The company designs and manufactures microprocessors, boards, and semiconductor components that are used in computers, servers, and networking and communication products. The company is the world's largest supplier of microprocessors, with a worldwide market share of more than 75%.

Intel reported good Q4 results and gave better-than-expected guidance for 2012. The enterprise and emerging market strength pushed its PC sales while strong data traffic drove Data Centre revenue. Going forward, improving trends in Cloud and High Performance Computing are expected to drive server processor growth. The company's recent QLogic acquisition has increased its breadth of product line and strengthened its position in the super computing market.

Intel's Data Centre Capex guidance further supports the server processors' growth and upside potential to its margins in 2012. With new product cycles (Ivy Bridge, Romley and Medfield) and investments in its manufacturing and R&D capabilities, Intel is expected to gain market share against its competitor AMD (NASDAQ:AMD).

Intel is committed to returning cash to its shareholders with a healthy 3.1% dividend yield and $4 billion in stock repurchases last year. It has authorization for a further $10 billion repurchase. Even with modest PC trends, the server market growth provides with considerable upside potential for its near-term earnings and multiple expansion.

Johnson & Johnson engages in the research and development, manufacture and sale of various healthcare products worldwide. It operates in three segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics.

J&J's recent earnings results and guidance for 2012 show signs of improving fundamentals across its businesses. On the pharmaceutical front, in 2011, J&J received key product approvals for several of its drugs including Incivo, Zytiga, Edurant and Xarelto. These launches are expected to drive solid growth and improve margins through 2012. There is also sequential improvement on McNeil's situation as J&J works through its Consent Decree with the FDA. Looking at its MD&D business, volume trends seem to be improving, as physician office visits are stabilizing.

Despite FX pressures and a tough environment, J&J has posted good top-line growth in Q4, and is expected to continue to outperform its peers, driven by a robust pipeline of drugs in the near term. I recommend a buy.

Procter and Gamble is a worldwide manufacturer and marketer of consumer and personal care products. Its well known brands include Pampers, Gillette, Pantene, Duracell, Clairol, Charmin and Bounty. It largely is a mature market player, with only 30% of revenue coming from emerging markets.

Recently, P&G reported disappointing FYQ2 results and lowered its 2012 guidance. With its business heavily levered toward developed markets, I expect P&G will continue to struggle with top-line growth as consumer spending weakens. P&G is losing its market share in mature markets, and it needs more innovation in its products to drive the growth. Even in emerging markets, I believe that margins will be under pressure, due to investment spending, along with Forex headwinds.

With the macro headwinds in the form of input costs and currency drags, and continued softening of developed-market growth rates, I don't like the risk-reward profile of P&G, and expect a near-term downside.

General Dynamics is an aerospace and defense company that offers a portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; military and commercial shipbuilding, and communications and information technology. Its business groups include Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. I don't like General Dynamics given its exposure toward the defense end market. Defense spending in the U.S. is expected to be under pressure for the next several years as the government cuts expenditures to improve deteriorating fiscal condition. This is likely to pressure earnings as well as lead to negative sentiments on the industry causing multiple compression for defense stocks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.