Wednesday, November 23, 2011

Should you follow Buffett’s latest investments?

Warren Buffett is one of the most successful investors of all time. He has been able to transform a small textile company into a $200 billion conglomerate, with interests in insurance, manufacturing, utilities and railroads. One of the most followed segment of the business however is the investment portfolio. In a previous article, I discussed how investors who closely followed Buffett’s moves in the Berkshire Hathaway (BRK.B) stock portfolio between 1976 and 2006 would have significantly outperformed the market.

The company is required by the SEC to publicly disclose its stock holdings each quarter. Sometimes, Buffett is able to request an exception for holdings he is in the process of accumulating. This is to ensure that investors who closely follow his trades do not bid up the prices of stocks he is purchasing, while he is building up his positions.

Over the past week, Berkshire Hathaway disclosed new holdings in International Business Machines (IBM), Visa (V) and Direct TV (DTV), Intel (INTC), CVS Caremark (CVS) and General Dynamics (GD). I have long speculated that Buffett is a closet dividend investor. Indeed, Berkshire’s portfolio generates over $1.40 billion in annual dividend income. Most of the new additions represent stocks which could easily be characterized as dividend growth companies. I have analyzed each one below, in order to determine if they are decent buys at the moment.

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. Big Blue has paid dividends for 100 years, and raised them for each of the past 16 years. The company has been able to transform itself from a hardware company to service and consulting juggernaut. I would consider initiating a position in IBM on dips below $150. The major issue with IBM is the low yield of 1.70%. (analysis)

Intel Corporation (INTC) engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. The leader in microprocessors has been able to raise distributions for 8 years in a row. I would consider adding the stock to my portfolio in a few years. Yield: 4.10% (analysis)


Visa Inc. (V) operates retail electronic payments network worldwide. It facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. Since initiating a dividend in 2008, the company has raised it three times. Given its low payout ratio, and expected growth in EPS, Visa has the potential to become the next big dividend growth stock. Yield: 0.70%

General Dynamics Corporation (GD) provides business aviation, combat vehicles, weapons systems and munitions, military and commercial shipbuilding, and communications and information technology products and services worldwide. This dividend achiever has managed to boost distributions for 20 years in a row. Betting on this firm means betting that US will continue engaging in war activity in the future, and that the budget deficits would not decrease the appetite for military equipment. Yield: 3%

CVS Caremark Corporation (CVS) operates as a pharmacy services company in the United States. The company has managed to boost distributions for 8 years in a row. Yield: 1.50%

Overall, I find all of these as great businesses, which fit the Buffett model of having durable competitive advantages, pricing power and strong cash flow generation. Of all, I find Visa has the potential to be a great dividend growth story for the next few decades. Visa and MasterCard (MA) are basically a duopoly, which will certainly benefit from an increasing number of cashless transactions globally. Despite the low current yield, and the fact that the shares are close to being overvalued currently, I found the megatrends powerful enough to initiate a position in the stock. The long term dividend growth and total return potential of a company like Visa is hard to ignore. Thus being said, from a risk management perspective, I will only keep a smaller position in the company.

Full disclosure: Long V

Relevant Articles:


This article was featured in Carnival of Personal Finance #337

8 comments:

  1. Thank you. I would respectfully suggest that Warren is more than just a closet dividend investor. I think you can solidly welcome him into your camp. :)

    ReplyDelete
  2. Warren Buffet has been the most consistent and accurate investor for the past 50 years. Everyone should have their own custom investment plan, but if you follow anyone it should be him.

    ReplyDelete
  3. Hmmm you talk about each stock then Buffet buys them...conspiracy? Maybe he is following you instead of vice versa

    ReplyDelete
  4. I am relatively new to investing but stumbled upon your site. I think in these economic times investing like Buffet in stable, semi monopoly companies that are undervalued and yield dividends makes the most sense. You have some great info here! What are the key parameters to focus on when it comes to investing in dividends: look at the Dividend aristocrats, dividend yield, dividend growth, etc. Would love to have your input.

    ReplyDelete
  5. I saw an interesting article about Visa in Smart Money magazine recently (I think it was an interview with their CEO). Visa is looking to have a big play on this concept of the digital wallet, where consumers pay with their cell phones. More immediately though, they are facing a FED cap on the fees Visa can charge merchants for payments made with a debit card. That will probably be a hit to their revenue. Overall though, they have an incredible business model, no doubt a "wide moat" company.

    ReplyDelete
  6. I like INTC the best at a 4.1% dividend. I plan to buy some when the market has its inevitable correction :-)

    ReplyDelete
  7. Why the purchase of V if only three years of dividend raises?

    Are you breaking our own criteria? Or do you have an exception to every rule?

    ReplyDelete
  8. I agree that Visa seems like a "wide moat" company ... but I'm surprised Buffet picked Direct TV. With all the streaming options and the blurry line between internet and television, that company seems to have the "moat" of a typewriter manufacturer ...

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

Popular Posts