The commonalities of Buffett portfolio – cheap, fixed income, repurchase

Shareholder Letter

Before we talk about Buffett portfolio, my “Super Growth Stock Investing Rules” book and blog have many quotes from Buffett’s investment wisdom. If you are interested in him, you can start with my two previous blog articles: “Why Buffett deserves further study?” and “Warren Buffett’s Ground Rules“.

From Buffett’s stockholding history

I recently ran through all of Buffett’s major investments in general, and I made a big discovery. Buffett basically only invests in companies with regular cash flow income (i.e., dividends). If you are interested, you can think about the main targets that you know Buffett invests in, except for a very few investment cases, such as invested by Todd Combs and Ted Weschler, or BYD (ticker: BYDDF) led by Charlie Munger, as long as he invests in major cases, he prefer stocks dividends, otherwise he will not considere at all.

In his 1997 letter to shareholders, Buffett wrote: ” Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today’s repurchases, made at loftier prices.”

Buffett’s bond and preferred stock investments

In 2020, Buffett will help E.W. Scripps (US stock code: SSP) TV broadcast merge, aiming at a special stock dividend of up to 8%. In an ultra-low interest environment, the 8% dividend is very attractive to Buffett.

In 2008, Goldman Sachs (ticker: GS) was almost on the verge of collapse. When the chairman of Goldman Sachs came to him for help, Buffett did take advantage of the danger and asked to buy Goldman Sachs convertible corporate bonds with a yield of 15%. It’s the same reason to bail out Bank of America (ticker: BAC) at that time. The difference between the two is that Buffett has now left Bank of America as his second largest stock holding.

Earlier in 1983-1984, he bought the junk bonds (WPPSS) of the Washington Public Power Supply System. Washington Power is not going to fail at all, and it pays fixed coupons handsomely.

Align with his investment principle

If you recall the five major mergers and acquisitions he listed on the company’s website, one of them is that there must be continuous profits, fixed coupons and dividends are the direct evidence to prove continuous profitability.

Companies aggressively repurchase stocks

But in practice, Buffett usually likes to buy cheap stocks. Hewlett-Packard (ticker: HPQ) is a technology company with a low stock price and a legacy technology company. Berkshire acquired an 11 percent stake in the maker of personal computers, printers and supplies.

Abundant free cash flow, returning most cash flow to shareholders through aggressive share repurchases, and a dividend yield of nearly 3% could be several attractions for HP. Since the end of fiscal 2019 (ended October 2019), HP has repurchased more than 25% of its stock. Buffett likes companies that have the ability to easily buy back shares for large scales, because buybacks increase Berkshire’s stake in those companies.

The Buffett portfolio list goes on and on, the more famous ones include the following companies:

  • Apple (ticker: AAPL)
  • Bank of America (ticker: BAC)
  • Coca-Cola (ticker: KO)
  • American Express (ticker: AXP)
  • U.S. Bancorp (ticker: USB)
  • Moody’s (ticker: MCO)
  • Chevron (ticker: CVX)
  • Bank of New York Mellon (ticker: BK)
  • HP

Buffett portfolio almost has dividends paid

In Buffett’s “2021 Berkshire stock portfolio“, except for BYD, which I mentioned earlier, almost all of them distribute extremely high dividends, which is a great feature. Of course, this may be related to his investment style disliking technology stocks, favoring value stocks, or stable blue-chip stocks.

Here are the current values of key metrics such as share prices, price-to-earnings ratios, and dividend yields for Berkshire’s top ten holdings and some of its more prominent holdings at the end of 2021:

CompanyTickerMarket CapShare priceP/EDividend yield
Bank of AmericaBAC293.9636.4510.392.3%
American ExpressAXP134.53178.6517.91.16%
Coca-ColaKO 281.9965.05 27.442.71%
Moody’s MCO59.1431927.070.88%
US BancorpUSB74.250.0310.783.68%
General MotorsGM55.2738.045.680%
Mitsubishi UFJ MUFG73.5365.746.023.95%
Charter CommCHTR84.12486.9519.90%
Occidental Petroleum OXY51.3654.8226.410.95%
Hewlett-Packard HPQ38.2836.346.462.75%

Except for BYD, only General Motors and Chartered Communications do not distribute dividends. General Motors has a reason. General Motors declared bankruptcy in 2009. All financial operations will be strictly reviewed. Stocks have risen sharply because of Tesla (ticker: TSLA) and EV, and GM is still very cheap. The main reason is the financial reorganization of bankruptcy, which is not allowed to do so.

Why did he buy into Japan’s top five trading companies?

In 2020, Berkshire bought 5% of the shares of ITOCHU Corporation, Marubeni, Mitsui & Co., Ltd., Sumitomo Corporation and Mitsubishi Corporation. It is worth noting that their price-to-book value ratio is only 1.2 for ITOCHU, and the other four are all lower than 1.0; this is really cheap compared to US stocks. Please note that this incident also reflects the fundamental problem of Japan. As I wrote a while ago, the blog post “Japan is already a mediocre country, not as advanced as you think” is the same view, Japan’s national strength in full decline.

Buffett should have done a lot of homework and assessments before buying these top 5 Japanese trading companies, and I think the reason is that US stocks are too expensive (please note: Buffett has said many times that he is a great American, 85% of his investments are in US companies, no necessary, he will not invest in foreign companies).

After a 13-year bull market, the valuations of all U.S. stocks are “just too high.” This is a phenomenon that he has said many times. The Buffett indicator has been over 200% for a long time, and the S&P 500 has been trading at 39.26 (Dec. 2020) before the decline in the third quarter of last year.

The historically highest price-to-earnings ratio of 28 has caused Buffett to find no stocks to buy in the United States, and this has continued for 7 or 8 years, causing Berkshire pile more than 145 billion cash, which has a negative impact on the efficiency of capital utilization. The adverse effect will affect Berkshire’s intrinsic value and stock price–forcing him to find non-US investment targets, which is the main reason.

Like cheap company

This can be seen in the large acquisitions he made this year:

  • HP’s purchase price is 9 times the expected 2022 price-to-earnings ratio.
  • Occidental Petroleum (ticker: OXY) trades at less than 10 times expected earnings for 2022.
  • The $11.6 billion purchase of insurer Alleghany (ticker: Y) was also a good deal for Buffett, at about 1.25 times its book value and 12 times expected 2022 profits.

When he started buying Apple in 2016, it happened to be when Apple began to plummet, causing the price-earnings ratio to fall from 38 to 18. During that period, Apple’s lowest I remember dropped to $92, mainly because I mentioned in my book “The Rules of Super Growth Stocks Investing” in section 3-3 that the iPhone 6 sold too well in 2015, and the base period was too high.

As a result of poor business performance that year, the price-earnings ratio once fell to only 14, but it rose sharply for a while due to news reports that Buffett bought. Apple’s first buys were Combs and Weschler, something Buffett later explained.

Compared with the case in which he publicly admitted his mistakes at shareholder meetings, the purchase price of Precision Castparts in 2016 for about $32 billion was about 20 times the profit. The deal cost Berkshire a lot of money.

After all, he is still a thorough value investment believer in his mind, and he attaches great importance to the margin of safety.

Stocks are still his favorite

Fixed-income securities, including bonds and preferred stocks, make up only 17% of Berkshire’s portfolio, compared with 60% to 80% for most insurers. While Berkshire is the largest buyer of U.S. Treasury bonds, he prefers assets with fixed dividends, with stocks preferred.

Fixed income paranoid is what we should learn

This time, I dug out many of his past investments, from Buffett portfolio, and I did find that fixed income is almost a necessity for him, and he wants a higher yield than the market average. If I remember correctly, many years ago he said that when he considers investments, the bottom line of the annualized return of the underlying is 10%, and that is the bottom line regardless of any business cycle.

Stocks are more difficult to consider because they have capital gains and dividends, but bonds must strictly adhere to this standard. He has gone through countless business cycles in his life, and his thinking is really thorough. It is difficult for ordinary people to compare with him. Even among all investment masters, I think he should be one of the best.

Buffett portfolio has “a lot” of things for all of investors to imitate, and the hard part is that he almost always take everything into consideration, which is not easy.

Buffett portfolio

Closing words

I suggest my friends to re-read the last 5-6 section of my book “The Rules of Super Growth Stocks Investing” on stock splits and stock repurchases, and come back and read this article again, it will be helpful to everyone.

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