Warren Buffett's Top Dividend Stocks: 4 To Buy, 1 To Avoid

Includes: COP, GE, INTC, SNY, WMT
by: The Analyst Hub

The following are some of the top dividend stocks legendary value investor Warren Buffett is holding, according to Berkshire Hathaway's (NYSE:BRK.B) latest 13F filing.

Wal-Mart Stores, Inc. (NYSE:WMT): My Take - Buy

Warren Buffett holds 39,037,142 shares of Wal-Mart. Wal-Mart has a dividend yield of 2.6% and a payout ratio of 32%. Wal-Mart Stores, Inc. is the largest retailer in the world, with approximately 3,700 Wal-Mart stores and 600 Sam's Club stores in the U.S. and about 4,000 international stores. The Wal-Mart segment consists of Supercenters, Discount Stores and Neighborhood Markets. Sam's Club stores are membership warehouse clubs that primarily target small business owners.

Wal-Mart's earnings profile remains strong based on its leading position as the world's largest retailer, its resistance to economic downturns and a record of consistent growth. It continues to respond to a generally challenging consumer environment through its Everyday Low Pricing strategy.

Going forward, Wal-Mart's earnings potential is expected to be stable driven by its international growth, continued store format conversion in the U.S. and improving geographic diversification. As the inflationary and economic environment improves, Wal-Mart is expected to moderate its discounting and promotional measures pushing up the margins. With an expected increase in dividends and share buybacks, I believe it is a good time to buy WMT.

Intel Corporation (NASDAQ:INTC): My Take - Buy

Warren Buffett holds 11,495,000 shares of Intel. Intel has a dividend yield of 3% and a payout ratio of 33%. Intel is a good GARP stock. Intel's growth is significantly outperforming the broader PC markets. Going forward, cloud computing, secular growth in servers, and a strong product pipeline, are likely to drive good growth for the company. In addition, it also has a good share-growth opportunity in the mobile space. Trading at 10.62x forward earnings, the stock does not look expensive, and there is a good chance of multiple expansion. A 3% dividend yield is an added benefit for investors looking to buy the stock. I have discussed Intel's bull thesis in a previous article.

Sanofi SA (NYSE:SNY): My Take - Buy

Warren Buffett holds 4,063,675 shares of Sanofi. Sanofi has a dividend yield of 4.5% and a payout ratio of 48%. Sanofi is an attractively valued, well diversified, sustainable growth company. Going forward, otamixaban for ACS, the dengue fever vaccine, eliglustat (Gauche's) and the anti-PCSK9 antibody are the four major pipeline assets to watch out for. Each of these has over $1bn sales potential and could provide significant upside to Sanofi's growth targets. I find Sanofi's stock cheap at 9x forward earnings given the good growth prospects from these pipeline assets.

General Electric Company (NYSE:GE): My Take - Buy

Warren Buffett holds 7,777,900 shares of General Electric. GE has a dividend yield of 3.4% and a payout ratio of 50%. I like GE because of its late cycle portfolio positions which will help it in outperforming its peers over the balance of the cycle. In particular, acceleration in energy and aviation end market is likely to help GE achieve higher end of its 5%-10% core growth guidance. Better energy pricing is also likely to help GE's operating margins. In addition to good growth prospects in its industrial business, GE Capital can also provide significant upside for the stock given ~$7bn earnings run rate and >$25B in potential dividends over three-four years.

ConocoPhillips (NYSE:COP): My Take - Sell

Warren Buffett holds 29,100,937 shares of ConocoPhilips. ConocoPhilips has a dividend yield of 3.4%. ConocoPhillips is an integrated energy company. The company operates three segments: Exploration and Production, Midstream Services, and Refining and Marketing business. In July 2011, COP announced its intent to separate its upstream and downstream businesses. The spin-off is expected to be completed by Q2 2012. COP's PE multiple has expanded over the last few quarters in anticipation of the spin-off. I don't see any further chances of multiple appreciation from these levels.

In fact, once the spin-off is completed, there could be downside in the stock prices of individual entities, as COP shifts from an integrated energy business to the pure-play E&P business. E&P businesses are usually valued using cash flow multiples. COP's E&P assets seem less attractive than its pure-play peers, with expected long-term growth of 3%-4%, which is well below the large-cap E&P average of 8%-9%. Also, COP's low organic free cash flow is likely to limit its ability for share buybacks after its asset divestiture program is completed, and its dividend might be at risk as well.

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