Buffett’s success has a method
Commonalities in his stock holdings
I have published the following articles previously:
- “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“
- “Possibility of long-term holdings, Deep dive on Buffett’s case“
- “How Buffett Structures His Long-Term Investment Portfolio“
- “The companies Buffett owns more than 20%“
I have conducted an in-depth analysis on the commonality of Buffett’s holdings. Interested investors can refer to these articles I published previously.
Dividend is one of the Commonalities
The secret to Buffett’s success is broad, long-term holdings, and portfolio concentration plays a key role. But one of the unsung heroes of Berkshire Hathaway’s success that doesn’t get enough credit or attention is dividend stocks.
Companies that pay regular dividends are usually time-tested and consistently profitable. It also doesn’t hurt that dividend-paying stocks have historically outperformed non-dividend-paying stocks by a large margin.
Including common stock and preferred stock, as well as holdings in Buffett’s secret portfolio, Berkshire (tickers: BRK.A and BRK.B ) is estimated to receive $6,137,691,721 in dividend income. However, just seven of these stocks will account for 87% of all dividend income.
Chevron
In fact, one-sixth of the dividend income Buffett’s company will collect this year will come from energy stock Chevron (ticker: CVX ), which has increased its annual dividend for 36 consecutive years.
Buffett and his investing lieutenants (Todd Combs and Ted Weschler) have piled into Chevron since late 2020, possibly on the belief that energy commodity prices will remain high for the foreseeable future. Russia’s invasion of Ukraine, combined with pandemic-related demand uncertainty that has reduced capital investment for more than three years, has created supply chain problems for crude oil and natural gas. Tight markets for oil and natural gas typically lead to higher spot prices for energy commodities.
Other attractions of Chevron include Chevron’s balance sheet and capital return program. With higher oil prices through most of 2022, Chevron reduced its net debt from $25.7 billion to just $5.4 billion and announced share buybacks of up to $75 billion.
Occidental Petroleum
In the energy sector, oil stock Occidental Petroleum (ticker: OXY ) is Berkshire’s second-largest dividend payer. The more than 211 million common shares owned by Buffett & Co. will generate more than $152 million in dividend income this year. In addition, Berkshire owns $10 billion worth of Occidental Petroleum preferred stock that yields 8% — so there’s an additional $800 million in revenue.
Buffett’s thesis for buying Occidental is somewhat similar to Chevron’s, but with two major differences. While disruptions in energy supply chains are a catalyst for rising energy commodity prices, Occidental gets a higher percentage of its revenue from drilling than Chevron. That means Occidental is more vulnerable to fluctuations in crude spot prices.
Another thing to note is that Occidental Petroleum has more debt on its balance sheet than Chevron. While the company has cut its net debt by nearly half over the past two years and reintroduced a share buyback program, more work needs to be done to improve the company’s financials.
Bank of America
There is no industry in which Buffett is most confident or more willing to invest than bank stocks. Money center giant Bank of America (ticker: BAC ), Berkshire’s second-largest holding by market capitalization, is currently on track to deliver nearly $909 million in dividend income this year.
Buffett likes bank stocks because the industry is cyclical. Buffett and his investing lieutenants fully understand that recessions are a normal part of the business cycle. Instead of trying to time the recession, Buffett and his team are doing the best for Berkshire by combining their company’s portfolio with businesses like Bank of America that benefit from a long-term expansion that grows in tandem with the U.S. and global economies. Interests.
Despite growing concerns about the health of U.S. and European banks, U.S. banks appear to be on solid footing. As the most rate-sensitive U.S. money center bank, Bank of America benefits more than any of its peers as the Federal Reserve raises rates. Even if loan losses rise in the short term, higher net interest income from higher rates will more than offset the increase in loan losses.
Apple
Technology stock Apple (ticker: AAPL) was called one of Berkshire’s “Big Four” by Buffett in his 2021 shareholder letter. Apple, by far Berkshire’s largest holding by market value, is on track to pay Buffett’s company more than $842 million in dividend income this year.
Apple’s brand and innovation make it such a special company. It has been the most valuable global brand for the 10th year in a row, according to Interbrand, and since launching a 5G version of its popular iPhone in the fourth quarter of 2020, it has captured about half of all smartphones in the US. the
The company is also shifting its focus to subscription services. These provide sustainable double-digit sales growth, high margins, and significant top-line swings that tend to offset any revenue associated with physical product replacement cycles.
However, what Buffett likes most about Apple may be its capital return program. Apple pays the world’s largest dollar dividend and has repurchased more than $550 billion worth of common stock over the past decade.
If investors want to know Apple as a company, you can refer to this article I wrote for getting started with Apple: “How does Apple make money?“.
Coca Cola
Although beverage stock Coca-Cola (ticker: KO ) is only the fifth-largest dividend payer in Buffett’s portfolio, it’s a perfect example of relying on time as an ally. Based on Coca-Cola’s cost basis of $3.2475 per share and annual dividends of $1.84 per share, Berkshire’s Coca-Cola stake has a staggering 56.7% return on cost!
The beauty of Coca-Cola’s operating model is its predictability. Whether the U.S. and global economies are firing on all cylinders or faltering, Coca-Cola’s sales and earnings haven’t changed much.
This is largely due to Coca-Cola’s global presence in all but three countries (North Korea, Cuba and Russia). Broad geographic diversity enables Coca-Cola to generate stable cash flow in developed countries while relying on faster organic growth potential in emerging/developing markets.
Similar to Apple, Coca-Cola’s branding is spot on. It is arguably the most recognized consumer goods brand in the world. Whether its marketing team uses social media or sporting events to connect with younger generations, or relies on its holiday-themed associations to engage with more mature audiences, Coca-Cola has a history of connecting with multigenerational consumers.
If investors want to know about Coca-Cola, they can refer to these two Coca-Cola articles I wrote:
- “Pros and cons of investing in Coca-Cola“
- “Coca-Cola has been inferior to Pepsi in and even return rate is negative in past 10 years!“
Kraft Heinz
Packaged food and condiment supplier Kraft Heinz (ticker: KHC ) pays a solid dividend. Berkshire expects to earn more than $521 million in revenue from Kraft Heinz in 2023.
While most businesses have been adversely affected by the COVID-19 pandemic, Kraft Heinz has benefited from people staying at home. The company is popular for its easy-to-make meals, snacks and condiments.
It doesn’t hurt to own a dozen well-known food brands, either. Kraft Heinz’s strong pricing power has helped the company fend off historically high inflation.
The concern for Kraft Heinz and its shareholders is that the company has a considerable amount of long-term debt, goodwill, and intangible assets on its balance sheet. It will be next to impossible for Kraft Heinz to maintain its momentum during the COVID-19 pandemic without a lot of financial flexibility.
American Express
The seventh stock that accounts for a combined 87% of the $6.137 billion in dividend income Buffett’s company is expected to receive in 2023 is credit services company American Express (ticker: AXP). Over the past 30 years, American Express has been owned by Berkshire, with an impressive yield on cost of over 28%.
One of the keys to Amex’s long-term success has been its ability to do both. In addition to charging merchants a fee to process transactions on its trade network, Amex is also a lender. This enables the company to generate interest income and fee income from cardholders, as well as payment processing fees.
Among lenders, Amex has a knack for attracting high-income customers. High-net-worth individuals and couples are less likely to change their spending habits or not pay their bills during a mild recession. In other words, successfully attracting the top-earning decile could help Amex better weather the inevitable downturn in the U.S. and global economies.
If investors want to know about American Express, they can refer to this article I wrote about getting started with American Express: “American Express, one of the best investments of Buffett’s career”.
Related articles
- “Dividend-rich industries and 6 big differences from Taiwan”
- “5 high-yield ETFs in Taiwan, irreversible trends, and how much do Taiwanese like it?“
- “Why dividends disappeared suddenly these years?“
- “Considerations as a dividends investor“
- “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“
- “Possibility of long-term holdings, Deep dive on Buffett’s case“
- “How Buffett Structures His Long-Term Investment Portfolio“
- “The companies Buffett owns more than 20%“
- “How does Apple make money?“
- “Pros and cons of investing in Coca-Cola“
- “Coca-Cola has been inferior to Pepsi in and even return rate is negative in past 10 years!“
- “American Express, one of the best investments of Buffett’s career”
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