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All Contents © 2017The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| February 2017
USA International Trade Administration
There are 30 stocks in the Dow Jones Industrial Average, and Warren Buffett's Berkshire Hathaway (symbol BRK.B) has stakes in 11 of them. But as prescient as the Oracle of Omaha has proved to be over the years, that doesn’t mean you should run out and buy all of the stocks today.
In some cases, the shares are much pricier now than when Buffett first purchased them. In other cases, the holdings are relatively small and getting smaller. "Any Berkshire investment worth less than $100 million, I ignore," says David Kass, a professor at the University of Maryland's Robert H. Smith School of Business who studies Buffett and is a Berkshire shareholder.
More often than not, Buffett doesn't comment on his investment moves, so it’s not always possible to know his reasoning behind a big stock purchase or sale. But for buy-and-hold investors, Berkshire’s stakes in blue-chip companies can be instructive nonetheless. Here’s a closer look at the 11 Dow stocks owned by Warren Buffett.
Data is as of February 13, 2017, unless otherwise indicated. Click on symbol links in each slide for current share prices and more.
Stocks are listed alphabetically. Analysts' estimates and ratings are from Zacks Investment Research and Thomson Reuters. Berkshire’s stake in each company is based on the latest 13-F filing with the SEC and represents the number of shares owned as of December 31, 2016.
Share price: $78.91
Berkshire’s stake: 151.6 million shares
Dividend yield: 1.5%
Look no further than American Express to understand just how serious Warren Buffett is about investing for the long haul. He picked up his initial stake in the credit card company in 1991, when a struggling AmEx badly needed capital. Berkshire obliged, getting favorable terms on its investment. As of December 31, 2016, Berkshire owned 16.6% of AmEx’s outstanding shares. Buffett has played the role of white knight many times over the years, including during the 2008 financial crisis, as a means to get stakes in good companies at a discount.
The stock today: AmEx shares change hands at 14 times expected earnings for 2017, according to a survey of analysts by Thomson Reuters. That's in line with the stock's five-year average. Although the stock doesn't look particularly cheap, neither does it look expensive. Based on current estimates, the price/earnings ratio of the broader Standard & Poor’s 500-stock index is about 17. Analysts at William Blair Equity Research say the diversity of AmEx's business is underappreciated. The firm has a rating of "outperform" (buy, essentially) on the stock.
Share price: $133.29
Berkshire’s stake: 57.4 million shares
Dividend yield: 1.7%
Buffett doesn’t deserve all the credit for all of Berkshire’s investments. In fact, the decision to buy Apple shares last year was made by one of Buffett's stock-picking lieutenants. Apple does have some of the attributes Buffett has said he likes: It's a leader in its market, and it has a ton of cash at its disposal. The stock was also trading at lower levels when Berkshire did its buying throughout 2016.
The stock today: With shares reaching new highs, Apple is much more expensive now than it was when Berkshire first took a stake. But UBS analysts say the price gain is deserved because the number of iPhones in use continues to grow by double-digit percentages and retention rates remain high. UBS rates Apple stock a "buy," but picking up shares on dips over time might be preferable to going all in at today’s record prices.
Share price: $40.62
Berkshire’s stake: 400.0 million shares
Dividend yield: 3.4%
Buffett famously watched Coca-Cola for 52 years before investing in the stock. He finally took the plunge in 1988. “We expect to hold these securities for a long time,” Buffett wrote back then of his new stake in Coke in a letter to Berkshire shareholders. “In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” As of December 31, 2016, Berkshire owned 9.4% of Coca-Cola’s outstanding shares.
The stock today: Coca-Cola currently trades at 21 times expected earnings. That's a bit rich, given that analysts project average earnings growth of just 2% a year for the next five years, according to Thomson Reuters. Analysts at Credit Suisse have a "neutral" rating on the stock (hold, essentially), saying they have concerns about an expansion of global regulations on sweetened products. If you already own the stock, find comfort in a plump dividend that has increased 54 years in a row.
Share price: $30.04
Berkshire’s stake: 10.6 million shares
Dividend yield: 3.1%
Berkshire’s stake can be traced back to the lifeline that Buffett threw to General Electric in 2008. At the time, GE’s finance arm was suffering the same as other big banks. "The GE investment resulted from Buffett's reputation and personal relationships, and Berkshire's very large cash position during the financial crisis," Kass says. But Buffett wouldn't have stepped in if he didn't believe in the company. "GE is the symbol of American business to the world," Buffett said at the time. "I am confident that GE will continue to be successful in the years to come." Berkshire received preferred shares and warrants in exchange for cash. The preferred shares paid handsome dividends until GE later bought them back, and the warrants gave Berkshire the right to buy GE common shares at below-market prices.
The stock today: Although GE's earnings for the quarter that ended Dec. 31 missed their estimate, analysts at UBS maintained a "buy" rating on the stock. The firm believes that cost cuts and wider profit margins will help GE's stock outperform the S&P 500 this year, as the company continues to streamline and restructure its operations.
Share price: $246.27
Berkshire’s stake: 11.0 million shares
Dividend yield: 1.1%
Goldman Sachs is another holding Berkshire picked up during the 2008 financial crisis. Buffett paid $5 billion for preferred shares and warrants to purchase common stock. The preferred shares came with a dividend yield of 10%. Buffett said the investments in Goldman Sachs and General Electric – and similar deals with Dow Chemical, Swiss Re and Wrigley – delivered a total of $2.1 billion annually in dividends and interest. Berkshire bought another $2 billion in Goldman stock when it exercised the warrants in 2013. Goldman redeemed its preferred shares in 2011.
The stock today: Credit Suisse analysts rate Goldman shares at "outperform," thanks in large part to the potential for lower corporate taxes and loosened financial regulations under the Trump administration. Not everyone is as enthusiastic about the stock, however, especially in light of its 35% share-price gain since Election Day. Of the 18 analysts surveyed by Zacks, seven have Goldman at "strong buy," two rate it a "buy," eight rate it a "hold" and one has a "strong sell" recommendation on the shares.
Share price: $179.36
Berkshire’s stake: 81.2 million shares
Longtime Berkshire watchers were surprised when the company revealed this stake in 2011 because Buffett had shown little interest in technology stocks. But after reading IBM’s annual reports for more than 50 years without buying a single share, he was finally swayed by what he saw closer to home. "We went around to all of our companies to see how their IT departments functioned ... and I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things," Buffett said at the time. Berkshire owned 8.5% of IBM’s outstanding shares as of December 31, 2016.
The stock today: UBS is "neutral" on IBM, but it says better times might be ahead now that a period of heavy investment back into the business is slowing down. Cost cuts will bolster the bottom line, and the company's Watson cognitive computing division is showing early promise. Buffett-like patience might be required, though, considering that the stock price has been stagnant for the past five years. IBM’s solid dividend yield helps.
Share price: $115.88
Berkshire’s stake: 327,100 shares
Dividend yield: 2.7%
During the 2008 financial crisis, Buffett reluctantly sold Johnson & Johnson shares to raise cash to invest in Goldman Sachs, GE and other struggling companies. By 2012, the reluctance had disappeared and Berkshire had essentially dumped its position in J&J, with Buffett saying the company was "messed up in a lot of ways" due to production problems and recalls. Despite the shift in sentiment, Kass says Berkshire’s initial foray into J&J made sense because the stock was undervalued at the time.
The stock today: The outlook for J&J is brighter these days than it was when Buffett abandoned ship, though the majority of analysts who follow the company are content to stand pat for now. Of the 18 analysts surveyed by Zacks, 10 rate it at “hold.” Seven consider the stock a “buy” or “strong buy” and just one calls it a “sell.” Income investors can rest easy. The dividend is as secure as it can be, having been raised every year for 54 straight years.
Share price: $88.31
Berkshire’s stake: 315,400 shares
Dividend yield: 3.0%
Berkshire was a longtime shareholder in Gillette when Procter & Gamble acquired the razor blade company in 2005. Buffett called it a "dream deal," as Berkshire received P&G shares in exchange for its Gillette holdings. As with Johnson & Johnson, Buffett reluctantly sold some P&G shares in 2008 to raise cash to invest in distressed companies. Cut to 2014. Berkshire struck a deal to buy Duracell from P&G. To avoid a big tax bill, Berkshire arranged to hand over P&G shares rather than pay cash for Duracell.
The stock today: William Blair Equity Research rates P&G at "outperform," noting that its focus on major brands, such as Tide detergent, and cost cuts offer "a solid total shareholder return opportunity." Shares are not on sale, however, trading at 21 times year-ahead earnings. For comparison, the S&P 500 trades at 17 times future earnings. P&G’s dividend is the definition of reliable; it dates back to 1891.
Share price: $86.44
Dividend yield: 0.7%
Credit cards are a Berkshire staple. The holding company also owns stakes in MasterCard and the aforementioned America Express. But Visa and MasterCard are growing faster than AmEx, says Kass, and both are investments of Todd Combs, one of Berkshire’s chief investing strategists not named Warren. Payments processing is a rapidly expanding market, thanks to the emergence of mobile payments, such as Apple Pay. Global revenue from mobile payments is forecast to exceed $1 trillion by 2019, up from $450 billion in 2015, according to Statista, a data research firm.
The stock today: "On the heels of solid December quarter results, we are raising our estimates and reiterate our Outperform rating on Visa," says Credit Suisse. "We believe shares are attractively valued at 21 times ... calendar 2018 earnings." And while the dividend yield is nothing to write home about, Visa shares have proved their long-term worth by outpacing rivals MasterCard and AmEx in price growth over the past two, five and 10 years.
Berkshire’s stake: 928 shares
Dividend yield: 4.7%
Verizon seemed like an unlikely bet for Buffett. Its future is hitched to growth in digital mobile content and advertising, which makes it something of a bet on tech. That's why it probably wasn't a Buffett call. "Verizon is likely an investment of Todd Combs or Ted Weschler, who have several telecom stocks in their portfolio," says Kass of Buffett’s two chief stock-picking lieutenants. Either way, the foray was short-lived: Berkshire all but abandoned its Verizon position by the end of 2016, selling almost all of its 15 million shares.
The stock today: The first thing that stands out with Verizon is the high dividend yield. Even better for income investors is the fact that the company has raised its payout every year since 2006. However, most analysts think the stock will underperform the S&P 500 this year. Of the 25 analysts surveyed by Zacks, 18 rate the shares at "hold," five have it at "buy" or “strong buy,” and two rate it at "sell." William Blair Equity Research, which rates the company at "market perform" (hold, essentially), notes that intense competition among telecoms is hurting financial results of late. Verizon bought AOL in 2015 to beef up its mobile content and advertising technology, but its pending deal to acquire Yahoo faces uncertainty after Yahoo disclosed serious security breaches that exposed user information to hackers.
Share price: $67.77
Berkshire’s stake: 1.4 million shares
Buffett sold off big chunks of Berkshire’s Walmart stake last year. That’s because the retailer is losing out to Amazon.com, Kass says. Buffett has made no secret of his admiration for Amazon's CEO, Jeff Bezos. "We haven't seen many businessmen like him,” Buffett says of Bezos. “Overwhelmingly, he's taken things you and I've been buying and he's figured out a way to make us happier buying those products, either by fast delivery or prices or whatever it may be, and that's remarkable."
The stock today: Berkshire first bought Walmart in 2005, and it has been a disappointing investment. Shares in the world’s largest retailer have gained 32% on a price basis since mid 2005. The S&P 500 is up 80% over the same time frame. Analysts at Stifel have a “hold” recommendation on Walmart shares. “We think a continued focus on grocery, including improved online and mobile ordering and increased offerings of more healthful products (i.e., organic), will continue to drive modest share gains,” Stifel analysts say.
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