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Warren Buffett's Dividend Portfolio

Warren Buffett’s Berkshire Hathaway outperformed the S&P 500 by 11% per year from 1965 through 2017, generating an overall gain of 2,404,748% compared to the market’s total return of 15,508%.

It’s no wonder why investors closely monitor Warren Buffett’s portfolio. He is arguably the greatest investor of all time.

You can download an up-to-date list covering all of the dividend stocks owned by Warren Buffett by clicking here.

While Berkshire Hathaway itself does not pay a dividend because it prefers to reinvest all of its earnings for growth, Warren Buffett has certainly not been shy about owning shares of dividend-paying stocks, and we will analyze each of Buffett’s dividend stocks in this article.

A dividend is often the sign of a financially healthy and stable business that is committed to rewarding shareholders. These are some of the qualities Warren Buffett looks for when he invests.

Berkshire Hathaway Portfolio Update

On Wednesday, November 14, 2018, new information was released about Berkshire Hathaway’s portfolio. Most quarters are fairly uneventful for the Oracle of Omaha, but Buffett and his team made a few notable moves during the third quarter of 2018.

With over $100 billion in cash and short-term investments, its most ever, Berkshire Hathaway has plenty of capital to deploy. However, the firm has struggled to find high quality investment opportunities at reasonable prices.

Berkshire did invest around $7 billion in new positions during the third quarter, picking up stakes in JPMorgan Chase (JPM), Oracle (ORCL), PNC Financial Services (PNC), and Travelers (TRV). 

The firm also increased its existing positions in Goldman Sachs (GS), Bank of America (BAC), U.S. Bancorp (USB), and Bank of New York Mellon (BK) by at least 20% each. Much smaller additions (increases of 2% of less) were also made to Delta Air Lines (DAL), General Motors (GM), and Apple (AAPL).

Last quarter Berkshire Hathaway was most attracted to the financial sector. Since early 2018 bank stocks have underperformed as the yield curve (difference between shorter- and longer-term Treasuries) has flattened, reducing the profitability of lending. Buffett appears to remain bullish on the long-term outlook for banks and sees value here, especially given the economy's current strength. 

Besides banks, Buffett's new investment in Travelers, a property and casualty insurance firm, isn't a big surprise. Few investors know the insurance space better than Buffett (he began studying Geico in 1951), and Travelers has an impeccable long-term track record of managing risk appropriately, delivering higher profitability than its peers, and creating value for shareholders.

Berkshire Hathaway's $2 billion investment to acquire a position in Oracle was arguably the most surprising move during the quarter. However, the firm's approach to the technology sector continues evolving and, apparently, becoming more openminded given its recent investments in IBM and Apple. 

Oracle's stock has largely treaded water over the past year, but its valuation appears undemanding with a forward P/E ratio of 14.2. Berkshire was probably attracted to the firm's excellent cash flow generation (software is a sticky, high recurring revenue business) and opportunity to transition its business to a cloud-based delivery model.

During the third quarter, Berkshire Hathaway also exited its small (less than 0.1% of the portfolio's value) positions in Walmart (WMT) and drugmaker Sanofi (SNY). The firm had been slowly exiting Walmart, perhaps due to concerns over the risk e-commerce poses to the retailer's outlook for profitable growth. 

Sanofi had been in Berkshire's portfolio since 2006. It's hard to say why Buffett decided to exit the position now, but its small size in the portfolio suggests there was never a lot of conviction behind the investment. With Sanofi's stock price rallying more than 15% since early May, perhaps a timely opportunity was provided to move on. 

At the end of September 2018, Warren Buffett owned a total of 45 publicly-traded stocks. Interestingly enough, 34 of these holdings pay a dividend, and several of them have yields in excess of 4%.

Let’s take a closer look at Warren Buffett’s recent trades and what he might be thinking.

Notable Additions

JPMorgan Chase (JPM) : new position worth $4 billion; 1.8% of portfolio
JPMorgan Chase is commonly regarded as one of the best-managed banks by many investors, so the firm has likely been on Buffett's wish list for a while. Todd Combs, one of Berkshire's portfolio managers, is actually on JPMorgan's board, and in 2012 Buffett said he has a personal stake in the bank. JPM's stock dropped by 12% from its peak in February 2018 through early July, perhaps providing Berkshire with a timely opportunity to take its first bite.

Oracle (ORCL): new position worth $2 billion; 1.0% of portfolio
We actually hold shares of Oracle in our Long-term Dividend Growth portfolio. The tech giant is one of two dominant players in the global enterprise software market (SAP is the other). Oracle provides a range of database and middleware software, application software, cloud infrastructure software, and hardware systems to more than 400,000 business customers.

The firm's well-known brand, recurring revenue business model, mission-critical solutions, and high switching costs make it a durable cash cow, albeit a slow-growing one. Oracle’s market is undergoing a meaningful transition from delivering software onsite to a cloud-based delivery model, and its likely that Berkshire believes this evolution will be a long-term positive for the company that the market is not pricing in.

Goldman Sachs (GS): increased position by 38%; 1.9% of portfolio
Goldman Sachs' trading business has struggled this year due largely to low volatility across financial markets and the continued shift to passive funds. With its stock price dipping, the firm's price-to-book multiple dropped about 20% from its 2018 high. Buffett has a long history with Goldman Sachs that predates the financial crisis and remains optimistic about the firm's long-term outlook.

Bank of America (BAC): increased position by 29%; 11.7% of portfolio
Berkshire Hathaway's involvement with Bank of America dates back to 2011 when it bought $5 billion of preferred stock and received warrants (similar to stock options) for 700 million shares that the firm could exercise over the ensuing decade.

Berkshire exercised its warrants during the third quarter of 2017 and has continued accumulating shares of the bank since then. Bank of America's underlying performance has been solid, but its stock has sold off with the rest of the industry since March 2018 as investors worried about interest rate volatility and the economy's ability to continue its strong pace of growth.

Notable Reductions

Walmart (WMT): exited position; 0% of portfolio
Berkshire Hathaway first invested in Walmart in 2005 and was presumably attracted by the company's cost advantages. As the world’s largest retailer, Walmart can exert massive pressure on its suppliers to keep its prices low for consumers. Smaller rivals were unable to compete with Walmart’s prices, which resulted in Walmart dominating most areas it operated in.

However, online shopping is changing the brick-and-mortar retail game. Walmart has to invest significantly in its e-commerce operations to remain competitive, and the firm also faces pressure from rising wages and cost inflation. As merchandise becomes increasingly accessible to consumers online, especially from digital-focused, low-cost giants like Amazon, Walmart's core competitive advantage could slowly erode. 

Buffett began exiting his Walmart stake in 2016 and took advantage of the stock's pop last quarter to finish getting out.

Phillips 66 (PSX): reduced his position by 55%; 0.8% of portfolio
Berkshire's decision to trim its position in Phillips 66 was announced earlier this year and driven by regulatory requirements. Here's the formal statement Buffett issued:

"This transaction was solely motivated by our desire to eliminate the regulatory requirements that come with ownership levels above 10 percent. We remain one of Phillips 66's largest shareholders and plan to continue to hold the stock for the long term."

Warren Buffett’s Investment Strategy

Warren Buffett has evolved as an investor since launching his original partnership in 1956. Back then, Warren Buffett’s portfolio was much smaller in size and allowed him to pursue the greatest inefficiencies he could find in the market almost regardless of the stock’s market cap. He focused intensely on finding stocks trading at cheap valuations.

Buffett was not afraid to make a single position account for more than 25% of his portfolio and stated that he would be comfortable investing up to 40% of his net worth in a single security if the probabilities were deemed to be extremely in his favor, limiting risk.

Warren Buffett’s portfolio remains concentrated today, and his four largest positions each account for over 10% of Berkshire Hathaway’s portfolio. The idea behind running a concentrated portfolio is that there are relatively few excellent businesses and investment opportunities in the market at any given time, and owning too many positions reduces the impact from your few best ideas.

Importantly, Warren Buffett’s investment strategy has always been focused on the concept of staying within one’s circle of competence. Buffett has said that “risk comes from not knowing what you’re doing.”

In other words, never invest in a business or industry that is too hard for you to understand. The reality is, most investment opportunities fall outside of our circle of competence and should be ignored. 

Since the days of his initial partnership, Buffett’s strategy has evolved to concentrate more on buying up wonderful businesses at reasonable prices rather than digging through the bargain bin for “cheap” stocks. He looks for companies that have strong economic moats and numerous opportunities for growth.

When Warren Buffett makes an investment, he has said that his favorite holding period is “forever.” The idea is to buy excellent companies with solid long-term growth prospects and let them compound over the long run.

Not surprisingly, our dividend investment philosophy shares many similarities with Warren Buffett’s. For that reason, it’s helpful to review the high-yield dividend stocks owned by Berkshire Hathaway.

Analyzing Warren Buffett’s Top High-Yield Dividend Stocks

We analyzed each of Warren Buffett’s stock picks that pay a dividend, starting with his highest-yielding dividend stocks.

For each of Warren Buffett’s investments, we review what the business does and the potential reasons behind Berkshire Hathaway’s attraction to the company.

Our analysis is updated quarterly as new information about Berkshire Hathaway’s portfolio is released. The holdings below are sorted by dividend yield.

1: Kraft Heinz (KHC)
Percent of Warren Buffett’s Portfolio: 8.1%
Dividend Yield: 4.8%   Forward P/E Ratio: 14.1x   (as of 11/15/18)
Sector: Consumer Staples   Industry: Miscellaneous Food
Dividend Growth Streak: 3 years

Kraft Heinz is one of the largest food and beverage companies in the world. The company sells a wide variety of condiments, sauces, cheese and dairy products, meals, meats, beverages, and other grocery products in more than 190 countries.

The company was formed after Heinz acquired Kraft in 2015. Both companies have operated in the food industry for over 100 years and collectively own famous brands such as Jell-O, Velveeta, Lunchables, Bagel Bites, Philadelphia, Ore Ida, Planters, Oscar Mayer, and many others.

Berkshire Hathaway and a private equity firm teamed up to take Heinz private in 2013 and later acquired Kraft Foods in 2015. Kraft Heinz is Warren Buffett’s second biggest holding, behind only Wells Fargo.

Warren Buffett’s stake in Kraft Heinz was largely a play on owning a business with durable and proven brands that are expected to continue growing over time. Combined with ongoing cost cuts, margins will likely continue expanding over the coming years, too.

Here is what Warren Buffett had to say about Berkshire Hathaway’s stake in Kraft Heinz:

“The short term doesn’t make much difference to us, because we will be in this stock forever. This is a business with us. It’s not really a stock…It’s where the new Kraft Heinz Co. is 10, 20, 50 years from now that counts to Berkshire. These are brands I liked 30-plus years ago, and I like them today. And I think I’ll like them 30 years from now.”

Kraft Heinz’s products are found on grocery shelves around the world and will likely remain entrenched for many years to come, even if their growth rates aren’t stellar.

While this seems like another Buffett stock that is intended to be boring and predictable for long-term income investors, some packaged food giants such as Kraft Heinz are struggling to adapt their portfolios the healthier eating trend.

Some investors are even wondering if Kraft Heinz's dividend could eventually come under pressure if the firm's growth struggles don't reverse. We reviewed Kraft Heinz's dividend safety and struggling turnaround below.

Read More: Our Analysis of Kraft Heinz

2: STORE Capital (STOR)
Percent of Warren Buffett’s Portfolio: 0.2%
Dividend Yield: 4.5%   Forward P/AFFO Ratio: 15.5x   (as of 11/15/18)
Sector: Real Estate   Industry: Retail REIT
Dividend Growth Streak: 3 years

STORE Capital is a real estate investment trust that Berkshire Hathaway acquired an initial stake in during the second quarter of 2017. While the company only accounts for about 0.2% of Buffett’s portfolio, Berkshire owns approximately 10% of the firm’s shares.

STORE is a net-lease REIT that primarily owns single tenant, retail-focused properties. Service assets (e.g. early childhood education, health clubs, pet care, movie theaters) account for 69% of its rental income, followed by retail (e.g. furniture stores, home goods, outdoor outfitters, hobby centers) at 17% and manufacturing (e.g. playground equipment, medical devices, aerospace components) at 14%.

With a 99.6% occupancy rate, 14-year averaging remaining lease contract term, and 1.8% average annual lease escalation clause, STORE’s business appears to be on very solid ground. The REIT also enjoys healthy diversification and has a large number of investment opportunities it can pursue for growth.

STORE Capital has more than 400 customers (top 10 are less than 20% of total rent) and over 2,000 investment property locations across 48 states. STORE’s property investments total more than $6 billion, and management believes the market for its properties exceeds $2.6 trillion in value (more than 1.6 million properties), providing ample room for growth.

While this investment doesn’t seem likely to move the needle much for Berkshire Hathaway’s overall performance, Buffett can’t pass up on a potential bargain when he sees one. STORE Capital’s stock fell 35% from July 21016 through May 2017 as sentiment soured on virtually all retail-related businesses. Buffett’s shares were also acquired in a private placement deal, which allowed him to buy the stock at a discount to its price at the time (and actually below its 52-week low).

Buffett is quite familiar with this space as he acquired a personal position in Seritage Growth Properties (SRG) in December 2015. Seritage is a REIT that primarily serves Sears and Kmart but is gradually re-leasing space to third-party retailers at much higher margins. These moves seem to suggest that Warren Buffett believes many brick-and-mortar retailers are more durable than investors are pricing in, even in today’s increasingly digital world.

Read More: Our Analysis of STORE Capital

3: General Motors (GM)
Percent of Warren Buffett’s Portfolio: 0.8%
Dividend Yield: 4.3%   Forward P/E Ratio: 6.1x   (as of 11/15/18)
Sector: Consumer Discretionary   Industry: Domestic Auto Manufacturers
Dividend Growth Streak: 0 years

General Motors is one of biggest manufacturers of cars and trucks with more than 7 million retail vehicle sales per year. General Motors has embarked on a multi-year strategy to redesign and expand its truck and crossover portfolio, which is more profitable and growing faster than passenger cars. On a retail basis, close to 80% of GM sales are now trucks and crossovers.

The company owns the iconic North American brands Buick, Cadillac, Chevrolet, and GMC. In March 2017, GM agreed to sell its perennially unprofitable European operations for about $2 billion. As a result, approximately 75% of the company’s operating income now comes from North America.

Overseas, General Motors sells its vehicles under the Holden, Wuling, Baojun, and Jiefang brands, and China is GM’s second largest market and number one by volume.

Berkshire Hathaway bought its initial stake in General Motors in early 2012 and last increased its position by 2% during the third quarter of 2018. Warren Buffett is very familiar with the auto industry and has stakes in a handful of auto dealerships, so his involvement with GM isn’t overly surprising.

Buffett likes companies that have dominant shares of their markets, and GM is no exception with nearly 17% global share. General Motors has the largest market share in North America and South America and is the second largest player in the Asia, Middle East, and Africa region.

Buffett probably sees substantial value in many of the company’s brands as well. From cheeseburgers to Chevrolet, Warren Buffett loves American icons.

As a value investor, Buffett has to like General Motors’ valuation, too. The company trades at a single-digit price-to-earnings multiple and has a dividend yield close to 4%.

The stock looks cheap because investors are worried about the auto cycle rolling over as well as risks posed by the adoption of self-driving cars in the future. Many investors still have a sour taste in their mouths from General Motors’ bankruptcy and subsequent government bailout during the financial crisis, too.

However, the “new” GM is much stronger than its predecessor and has substantially improved its earnings power and financial health, which management hopes will allow the company to continue paying its dividend during the new industry downturn.

Buffett’s favorite holding period is “forever,” and he probably sees plenty of room for General Motors to continue growing its earnings over time as it continues cutting costs and making investments in higher-margin areas.

As a matter of fact, GM’s management team hopes to improve pretax profit margins from under 7% in recent years to about 10% over the next five years. Management also believes global auto sales will rise from 85 million to 130 million by 2030, which would certainly boost GM’s earnings, and the company is pouring money into self-driving vehicles where it appears to be a leader.

While the auto industry is certainly cyclical, GM appears well-positioned to get through almost any environment and remain relevant for a long time to come.

Read More: Our Analysis of General Motors

4: Verizon (VZ)
Percent of Warren Buffett’s Portfolio: 0.01%
Dividend Yield: 4.1%   Forward P/E Ratio: 12.5x   (as of 11/15/18)
Sector: Communications   Industry: Integrated Telecommunication Services
Dividend Growth Streak: 12 years

Verizon is the largest wireless service provider in the United States and reaches over 98% of the country’s population with its 4G LTE network.

Wireless operations account for over 85% of Verizon’s EBITDA and consist primarily of voice and data services and equipment sales.

At the end of 2017, Verizon Wireless had over 116 million retail connections and generated sales of $126 billion.

Warren Buffett bought his initial stake in Verizon during the first quarter of 2014, but he sold 99% of his position during the fourth quarter of 2016.

Berkshire Hathaway might have initially liked Verizon because the company enjoys strong brand recognition and operates in an industry characterized by high barriers to entry, inelastic product demand, and a relatively slow pace of change.

Building and maintaining a high quality communications network costs billions of dollars each year, and Verizon is one of the few companies with a large enough base of subscribers to be able to afford this cost each year.

Verizon also owns the largest wireless network in the country, allowing it to reach more customers than its rivals and provide better service, which historically enabled the firm to capture strong profits as data consumption grew.

While industry pricing plans and contracts are constantly evolving, the essential nature of telecom services has remained steady. Customers need to communicate regardless of how the economy is doing, resulting in steady demand and predictable cash flows.

Why is Buffett exiting his position? You can never be sure, but he could be concerned about future growth opportunities in the capital-intensive wireless market and the increased competitiveness of low-cost rivals’ networks (e.g. Sprint, T-Mobile).

In fact, Verizon reported its first-ever quarter of wireless subscriber losses in early 2017, and unlimited data plans are now the new industry standard. It could be harder for Verizon to monetize wireless data growth in the years ahead, although the company has bounced back nicely over the past year.

Read More: Our Analysis of Verizon

5: Phillips 66 (PSX)
Percent of Warren Buffett’s Portfolio: 0.8%
Dividend Yield: 3.4%   Forward P/E Ratio: 10.2x   (as of 11/15/18)
Sector: Energy   Industry: Oil Refining & Marketing
Dividend Growth Streak: 6 years

Phillips 66 was spun off from ConocoPhillips in 2012 and generates the majority of its profits from refining oil, marketing refined petroleum products such as gasoline, and selling various chemicals such as plastics that are made from oil.

Warren Buffett was previously invested in ConocoPhillips, which spun off Phillips 66 in 2012. He subsequently sold out of his stake in ConocoPhillips and increased his stake in Phillips 66.

Phillips 66 is benefiting from the drop in oil prices because oil is a major input cost for its refining operations. Since the price of gas hasn’t fallen as much as the price of oil, the company’s refining operations are enjoying profit increases.

However, Warren Buffett doesn’t buy stocks for short-term profits. When he makes an investment, he plans to hold on forever.

In the case of Phillips 66, Berkshire Hathaway is likely excited about the company’s plan to reshape its business and capitalize on the North American energy renaissance.

Management is investing in midstream and chemicals operations to drive future growth, which will make the business less dependent on refining and provide more balanced cash flows.

As this plays out, Phillips 66’s businesses should benefit from growing North American energy production and see their collective earnings power rise.

Read More: Our Analysis of Phillips 66

6: United Parcel Service (UPS)
Percent of Warren Buffett’s Portfolio: 0.01%
Dividend Yield: 3.3%   Forward P/E Ratio: 14.5x   (as of 11/15/18)
Sector: Industrials   Industry: Air Freight Transport
Dividend Growth Streak: 8 years

United Parcel Services was founded in 1907 and has grown to become the largest package delivery company in the world. In 2017, UPS delivered 20 million pieces per day and generated total revenue of $65 billion.

Warren Buffett has owned United Parcel Services since 2007, although it has remained a very small part of Berkshire Hathaway’s portfolio.

Despite the small position size, UPS has strong competitive advantages. As a logistics company, UPS derives its economic moat from being a world-class operator with extremely efficient business processes.

Distributing products is largely a density game. The operator with the most routes is able to more efficiently deliver products and save customers costs.

With the largest integrated distribution network in its industry (over 110,000 vehicles and more than 550 aircraft), UPS enjoys stronger profit margins than its peers and has proven to be an extremely resilient business – the company has paid dividends since 1969 and averaged dividend growth of approximately 10% since its IPO.

Replicating the company’s distribution network would be extremely costly and impractical in most cases, protecting UPS’s market share. The continued rise of e-commerce seems likely to increase demand for the company’s services as well.

Read More: Our Analysis of UPS 

7: Restaurant Brands (QSR)
Percent of Warren Buffett’s Portfolio: 0.2%
Dividend Yield: 3.3%   Forward P/E Ratio: 20.7x   (as of 11/15/18)
Sector: Consumer Discretionary   Industry: Food & Restaurants
Dividend Growth Streak: 3 years

Restaurant Brands International is the parent company of Burger King and Tim Hortons, which combined in 2014 to claim the title of the world’s third-largest fast food business with over 20,000 restaurants.

Burger King is the second-largest fast foot hamburger chain in the world and serves more than 10 million customers every day.

Tim Hortons was founded in 1964 and is the largest quick service restaurant chain in Canada. The restaurant specializes in coffee, baked goods (e.g. doughnuts), and home-style lunches.

Berkshire Hathaway’s stake in Restaurant Brands arose from Warren Buffett’s involvement with the merger between Burger King and Tim Hortons, which granted him warrants to buy stock in the combined business.

Berkshire Hathaway also owns $3 billion of preferred shares in the company, which pay him a high-yield dividend of 9% each year. 

The consumer sector is home to many famous brands and has historically been one of Warren Buffett’s favorite places to pick stocks.

Burger King and Tim Hortons are two of the most well-known restaurant brands in the United States and Canada.

Importantly, both businesses seem to have plenty of potential for international growth. Burger King is already in more than 100 different countries, and Tim Hortons has little presence outside of Canada.

The company’s global scale, brand recognition, and prominent locations make it a free cash flow machine that should enjoy steady growth over the long term.

8: Wells Fargo (WFC)
Percent of Warren Buffett’s Portfolio: 10.5%
Dividend Yield: 3.3%   Forward P/E Ratio: 10.5x   (as of 11/15/18)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 6 years

Wells Fargo’s roots can be traced back to the 1850s, and the company has since grown to be the nation’s third-largest bank by assets. Wells Fargo runs 90 business lines across a mix of banking, insurance, mortgage, investment, and consumer & commercial finance services.

Overall revenue is split almost equally between traditional loan-making operations (53% of sales) and noninterest income (47%) from brokerage advisory services, credit card fees, commissions, mortgage originations, and more.

Unlike most of its big bank peers, Wells Fargo has little involvement with investment banking and trading operations and instead chooses to focus on basic lending businesses that are generally thought to have less risk.

Wells Fargo is one of Warren Buffett’s biggest holdings and accounts for more than 12% of Berkshire Hathaway’s portfolio. Buffett began accumulating shares of Wells Fargo in 1989, when pessimism surrounding bank stocks was extremely high.

At the time, Buffett made his investment in the company because he was very impressed with its management team.

Banking can be a disastrous business to invest in if reckless loans are issued, so the company’s management and culture are extremely important factors. In the case of Wells Fargo, it was historically thought to be one of the highest quality and most conservatively managed banks.

Buffett also probably likes Wells Fargo for the long haul because it possesses major cost advantages over its smaller peers. The bank has more retail deposits than any other bank in America and has seen its total deposits grow from $3.7 billion in 1966 to $1.3 trillion in 2017.

Wells Fargo pays less than 20 basis points of interest on its deposits, which allows its lending operations to make money in virtually any interest rate environment.

As the U.S. economy continues expanding, Wells Fargo should be able to mint money with its loan book and continue earnings superior returns on equity relative to its peers.

Aside from a trim of his position in 2017 to stay below the Fed’s 10% ownership threshold, Buffett has not made any trades in Wells Fargo related to the scandal that emerged in 2016. He would also face a steep tax bill if he sold his shares, which have a very low cost basis.

Few investors know the company better than Warren Buffett, and he was surprisingly bullish about the firm’s prospects at Berkshire’s annual meeting in May 2018.

Specifically, he commented that most of Berkshire’s best investments (American Express, Geico) were in firms that fell into trouble due to poor incentive systems that caused short-term problems. All big banks have had troubles, but he sees no reason why Wells Fargo would be inferior to other banks from investment and moral standpoints going forward.

Buffett and Munger like how Tim Sloan is correcting the bank’s mistakes and see no reason why Wells Fargo will be anything other than a large well-run bank that comes out stronger from this. Munger even suggested that Wells Fargo might be the bank that is most likely to behave the best in the future as a result of faulty incentive system coming to light.

Our analysis linked to below touches more on the sales scandal that has shaken the company.

Read More: Our Analysis of Wells Fargo 

9: Procter & Gamble (PG)
Percent of Warren Buffett’s Portfolio: 0.01%
Dividend Yield: 3.1%   Forward P/E Ratio: 20.8x   (as of 11/15/18)
Sector: Consumer Staples   Industry: Soap & Cleaning Preparations
Dividend Growth Streak: 61 years

Procter & Gamble is one of the largest consumer packaged goods companies in the world with a large number of well-known brands across categories such as laundry detergent, health & beauty, and shaving.

Some of P&G’s major brands include Tide, Pampers, Charmin, Vicks, and Febreze.

Procter & Gamble is the definition of a blue-chip dividend stock. Warren Buffett’s position in the company resulted from his investment in Gillette back in 1989.

Procter & Gamble acquired Gillette in 2005, which converted Buffett’s Gillette ownership into P&G shares.

Buffett had gradually been reducing his stake in P&G over the last decade and announced an agreement in late 2014 to buy Duracell from P&G in exchange for his shares of P&G.

With the deal closing in 2016, Buffett’s remaining P&G stake is extremely small. However, Berkshire Hathaway likely wanted to own Duracell because of its strong brand recognition and market share (25%). It’s also worth noting that Duracell was part of P&G’s acquisition of Gillette, so Buffett had plenty of familiarity with the company already.

As technology continues to permeate every part of society, Buffett likely believes batteries will become increasingly important power sources with a long runway for demand growth.

Read More: Our Analysis of P&G

10: Coca-Cola (KO)
Percent of Warren Buffett’s Portfolio: 8.4%
Dividend Yield: 3.1%   Forward P/E Ratio: 23.1x   (as of 11/15/18)
Sector: Consumer Staples   Industry: Soft Drinks
Dividend Growth Streak: 55 years

Coca-Cola needs no introduction as the largest beverage company in the world. While investors most commonly associate the company with the Coca-Cola brand, the business actually owns more than 500 sparkling and still brands covering nearly 4,000 different beverages. Over 20 of its brands generate over $1 billion in sales each, and sparkling beverages represented 72% of worldwide unit case volume in 2016.

Coke is also a very global company, with less than 20% of the company’s case volume sold in North America. Mexico, China, Brazil, and Japan accounted for more than 30% of Coca-Cola’s global unit case volume and are characterized by higher growth rates.

Coca-Cola might be Warren Buffett’s most famous stock investment. Buffett scooped up a major stake in Coca-Cola in 1988 after the 1987 stock market crash made the company’s valuation too enticing to pass up.

Coca-Cola’s strong brands and extensive distribution system around the world have enabled it to become the number one provider of sparkling and still beverages and increase its dividend for over 50 straight years, qualifying the company as a member of the dividend kings list.

Consumers have been conditioned to enjoy the company’s many brands, in part driven by Coca-Cola’s substantial marketing and advertising investments each year.

With strong brands that are proven to sell, Coke’s products are very difficult to replace on shelves. Competitors will have a hard time taking share from the company.

Buffett loves companies with economic moats, and Coca-Cola’s moat remains strong, even despite consumers’ shifting preferences for healthier beverages. As per capita income grows in emerging economies, where Coke has a major presence, demand should continue rising for its products.

Read More: Our Analysis of Coca-Cola 

11: Synchrony Financial (SYF)
Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 3.1%   Forward P/E Ratio: 6.4x   (as of 11/15/18)
Sector: Financials   Industry: Consumer Loans
Dividend Growth Streak: 1 year

Warren Buffett is no stranger to Synchrony Financial’s business (credit cards), which was the consumer finance unit spun out from General Electric in 2015. Berkshire had a stake in GE since the financial crisis, and the firm owns a stake worth more than $10 billion in American Express (AXP) and smaller positions in Visa (V) and Mastercard (MA).

Synchrony Financial is the largest issuer of store (i.e. private label) credit cards in the U.S., providing consumer loans on the behalf of well-known retailers, merchants, and manufacturers such as Walmart, Amazon, Lowe’s, PayPal, BP, and JCPenney. Many of its cards are customizable to allow retailers to provide unique benefits, features, and promotional financing options.

Buffett has invested in many lending businesses over the decades because their business models print money, so long as management appropriately manages risk. Synchrony Financial is essentially a spread business and profits from the difference in interest rates it charges on its credit card loans and the interest rates it pays on its bank deposits, which represent over 70% of its total funding sources. With rates on bank deposits remaining stubbornly low, Synchrony’s cost of financing is very favorable today.

Synchrony Financial does have a relatively high net charge-off rate (i.e. the percentage of loans written off) around 5%, but many of its credit cards also charge high interest rates (i.e. 20%+) to help compensate for this risk. Buffett is presumably bullish on Synchrony’s spread business and management of lending risk.

Synchrony’s card volume should presumably rise over time as its partners continue expanding their businesses and more shopping takes place online, which requires greater use of credit cards rather than cash.

SYF’s stock sold cratered nearly 20% in late April 2017 after reporting weak earnings. The company’s revenue grew 14% year-over-year, but investors worried after seeing that Synchrony increased its provision for loan losses by 45%, reducing the earnings outlook for 2017 and bringing into question the quality of the firm’s loan book.

Berkshire saw an opportunity to pounce on the stock and took it. Buffett seems to believe that Synchrony has a number of long-term growth opportunities and that its spread business remains in good shape, even after accounting for the higher charge-off rate.

12: JPMorgan Chase (JPM)
Percent of Warren Buffett’s Portfolio: 1.8%
Dividend Yield: 3.0%   Forward P/E Ratio: 10.8x   (as of 11/15/18)
Sector: Financials   Industry: Diversified Banks
Dividend Growth Streak: 8 years

Berkshire Hathaway initiated a position in JPMorgan Chase during the third quarter of 2018, but the firm's ties with the mega bank go further back. 

In 2012, Buffett stated he has a personal stake in the bank. And in September 2016, Todd Combs, Warren Buffett's possible successor, was named to JPMorgan's board of directors. 

As the largest bank in America, JPMorgan's scale and dominance are impressive:

  • Relationships with 50% of U.S. households
  • Does business with over 80% of Fortune 500 companies
  • #1 U.S. credit card issuer
  • #1 in North America and EMEA in investment banking fees
  • More than 5,000 branch locations

The firm's operations are extensive, spanning consumer and community banking (39% of earnings), corporate and investment banking (44%), commercial banking (14%), and asset and wealth management services (9%).

Thanks to its large size, diversification, and massive base of low-cost deposits ($1.4 trillion, of which about 30% have no interest cost), JPMorgan is a very efficient and profitable bank that is able to make money in practically any environment. Impressively, due to the bank's status as a low-cost producer, management also targets a return on tangible equity of 17%.

CEO Jamie Dimon runs JPMorgan very conservatively as well. The bank's capital reserve profile is even more conservative than the levels mandated by the Federal Reserve to help keep banks solvent during a severe global economic downturn, for example.

With bank stocks struggling throughout most of 2018, Berkshire Hathaway saw an opportunity to finally buy into one of the most impressive financial companies on Wall Street.

Read More: Our Analysis of JPMorgan Chase

13: PNC Financial Services (PNC)
Percent of Warren Buffett’s Portfolio: 0.4%
Dividend Yield: 2.8%   Forward P/E Ratio: 12.0x   (as of 11/15/18)
Sector: Financials   Industry: Regional Banks
Dividend Growth Streak: 8 years

Incorporated in 1983, PNC is a large regional bank with operations in nearly 20 states and more than 2,000 branches. The firm provides a mix of retail and commercial banking, mortgage lending, and asset management services (including a 22% minority ownership stake in BlackRock). Net interest income makes up a little over half of PNC's net revenue, with noninterest income accounting for the remainder.

Since PNC is not one of America's mega banks, it does not enjoy meaningful cost advantages compared to its larger peers (PNC's efficiency ratio sits near 60%). However, its relatively smaller size does mean it is not subject to as stringent of capital requirements and can more easily grow. 

PNC likely appealed to Berkshire Hathaway because of its conservatism. The bank outperformed its peers during the financial crisis (lower charge-offs), a testament to its disciplined underwriting culture, and today PNC maintains a reasonable loan to deposit ratio of 85%.

PNC is adapting its business model for the future as well, using money from its continuous cost savings programs to invest in digital technology efforts. Berkshire Hathaway owns a mix of mega banks and smaller regionals, but they are all disciplined operators.  

PNC is no exception and seems likely to continue growing its presence across the country.

14: U.S. Bancorp (USB)
Percent of Warren Buffett’s Portfolio: 3.0%
Dividend Yield: 2.7%   Forward P/E Ratio: 12.6x   (as of 11/15/18)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 7 years

U.S. Bancorp was founded in 1863 and is one of the 10 largest banks in the country as measured by assets. The company provides a full range of financial services, including lending, cash management, capital markets, and investment management services.

By business line, U.S. Bancorp generates 35% of its net income from consumer and small business banking, 33% from payment services, 22% from wholesale banking and commercial real estate, and 10% from wealth management and securities services. 

Overall, fee income accounted for 44% of total revenue in 2017. The company’s diversification makes it a more consistent and predictable business.

U.S. Bancorp has been one of Warren Buffett’s stock picks since before the financial crisis when he initiated a position in early 2007.

The company has a strong history of making high quality loans and remaining well capitalized relative to peers. As a matter of fact, U.S. Bancorp is the highest rated peer bank across all rating agencies when it comes to debt, providing it with funding and competitive advantages.

If Buffett owns the stock, it is safe to assume that USB’s culture is a conservative one that manages risk very carefully. This discipline shows up in USB’s profitability and efficiency metrics, which rank better than its peers.

Bank stocks look relatively cheap today because interest rates are expected to remain lower for longer. When rates are low, banks make less money on their lending operations.

Despite the tough environment for banks, USB’s loan portfolio has been growing at an annualized rate near 7% over the last decade.

The company’s loan book is also well-diversified and maintains little exposure to energy markets (less than 2% of total exposure). U.S. Bancorp also has an A+ credit rating from S&P.

Warren Buffett owns U.S. Bancorp because it is a high quality, conservatively managed business that has demonstrated an ability to achieve consistent growth. Over time, these types of companies should compound shareholders’ capital nicely.

15: Seritage Growth Properties (SRG)
Percent of Warren Buffett’s Portfolio: N/A (Buffett bought SRG personally)
Dividend Yield: 2.7%   Forward P/AFFO Ratio: N/A   (as of 11/15/18)
Sector: Financials   Industry: Commercial REIT
Dividend Growth Streak: 0 years

Seritage was spun off from Sears Holdings in July 2015 and purchased over 260 Sears and Kmart stores from the retailer for just under $3 billion. This deal was done to help Sears improve its cash position and reduce costs.

Seritage leased back 175 of its properties to Sears. As a REIT, Seritage makes money by collecting rent checks each month from its tenants. Today, Sears and Kmart stores account for close to half of Seritage’s rent revenue.

Unlike the other stocks on this list which are owned by Berkshire Hathaway, Warren Buffett personally purchased his 8% stake in Seritage Growth Properties in December 2015.

As most investors are aware, Sears is quickly fading into the horizon. Buying shares in a REIT that relies heavily on Sears today is indeed a curious move by Warren Buffett. He must see something else.

Most likely, Warren Buffett liked Seritage’s valuation because the REIT is gradually re-leasing space from Sears to third-party retailers for much higher rent rates (over 4x) than what the company is currently receiving from Sears for its properties.

In other words, the company’s current earnings are being significantly held back by its leases with Sears. As its mix of tenants improves to include more third-party retailers such as Nordstrom and Dick’s Sporting Goods, Seritage’s earnings power should meaningfully improve.

Buffett probably sees high value in the prime retail locations owned by Seritage and believes the company is under-earning. Just over 70% of rent is from 3rd party tenants (up from 20% at inception), indicating there is still a long ways for continued improvement.

Buffett also likes boring, predictable businesses, and many commercial REITs fit the bill. Cashing rent checks each month is not a bad business by any means, and prime retail locations should presumably rise in value over time to further enhance Seritage’s worth.

As the company begins to unlock the value of its real estate, the stock could do well and provide strong dividend growth in the years ahead.

However, in October 2018 Sears filed for bankruptcy. It remains to be seen how Seritage could be impacted by the bankruptcy proceedings, but it could face increasing financial pressure.

16: Johnson & Johnson (JNJ)
Percent of Warren Buffett’s Portfolio: 0.02%
Dividend Yield: 2.5%   Forward P/E Ratio: 16.9x   (as of 11/15/18)
Sector: Medical   Industry: Pharma
Dividend Growth Streak: 55 years

Johnson & Johnson is one of the biggest healthcare companies in the world with over $70 billion in sales. Most of J&J’s profits are from sales of branded pharmaceuticals, but the company also has big consumer products and medical devices businesses.

Johnson & Johnson is a very international business with just over half of its sales coming from international markets.

Johnson & Johnson used to be one of Buffett’s biggest holdings 10 years ago but is one of Berkshire Hathaway’s smallest holdings today.

Why did Warren Buffett invest in Johnson & Johnson in the first place? For one thing, healthcare is one of the best stock sectors for dividends because of its stability.

People require healthcare products and services regardless of how the economy is doing, which makes Johnson & Johnson’s cash flows very reliable. The company’s sales were only down in the low single-digits during the financial crisis, and JNJ’s stock beat the S&P 500 by 29% in 2008.

Johnson & Johnson’s management team has also positioned the company in markets it can dominate. Roughly 75% of its sales are from number one or number two market share positions.

To remain competitive, the company invests over $7 billion in research and development each year. While the development of new drugs is risky, Johnson & Johnson has an excellent track record and can use the predictable cash flows from its consumer businesses to steadily fund new product research.

J&J has a pristine balance sheet, generates reliable free cash flow every year, earns a strong return on equity, and is well positioned to benefit from rising global spending on healthcare. These are all good things that Buffett looks for when he invests.

Read More: Our Analysis of Johnson & Johnson

17: Delta Air Lines (DAL)
Percent of Warren Buffett’s Portfolio: 1.7%
Dividend Yield: 2.5%   Forward P/E Ratio: 9.8x   (as of 11/15/18)
Sector: Transportation   Industry: Airlines
Dividend Growth Streak: 4 years

Delta Air Lines is one of the biggest passenger airlines in the world. The company has routes servicing over 340 destinations located across more than 60 countries. Delta Air merged with Northwest Airlines in 2008 to create the largest airline in the world.

Operating airlines is a tough business. In fact, Delta declared bankruptcy in 2005, when it was the third largest airline company. Southwest (LUV) and JetBlue (JBLU) are the only two major airlines that have not filed for bankruptcy.

Volatile fuel prices, costly union labor forces, steep price competition, and capital intensive operations are just some of the major challenges faced by airlines. There are some positives, however.

The high costs required to operate an airline create barriers to entry. A large operator such as Delta can spread its fixed costs across all of its routes, allowing it to deliver it services more efficiently than smaller rivals or new entrants. Only so many routes between two destinations are needed as well, making it all the more difficult for a new player to gain share.

The big operators have consolidated in recent years, too. Delta Air and Northwest Airlines merged in 2008, United and Continental combined forces in 2010, and American Airlines and US Airways Group merged in 2013.

According to the Wall Street Journal, American, United Continental, Delta Air Lines, and Southwest now control more than 80% of U.S. domestic capacity, up significantly from five years ago prior to the merger consolidation activity.

It remains to be seen if this consolidation can result in a more rational competitive environment, marked by higher ticket prices and improved profitability from economies of scale and restructuring initiatives.

Berkshire Hathaway began purchasing shares of Delta in the third quarter of 2016. Delta is arguably one of the highest quality airlines. From leading operational metrics to fuel costs, the company is clearly ahead of the industry’s average marks.

Berkshire was likely attracted to Delta’s competitive advantages, which are nicely outlined here. Delta’s union labor force is much smaller than its rivals, the company is the largest airline by passenger volume (helps airplane utilization and leverages fixed costs), Delta buys cheaper used aircraft, and it even owns its own fuel refinery to save on costs (Buffett is very familiar with the refinery business). 

These qualities help Delta generate great free cash flow and earn a higher return on capital, which creates potential for faster earnings growth. Given the size of Warren Buffett’s portfolio, the firm needs to invest in rather capital intensive businesses that are big enough investment targets. Airlines apparently fit the bill, but they remain in the “too hard” bucket for me.

18: Travelers Companies (TRV)
Percent of Warren Buffett’s Portfolio: 0.2%
Dividend Yield: 2.5%   Forward P/E Ratio: 11.3x   (as of 11/15/18)
Sector: Financials   Industry: Property and Casualty Insurance
Dividend Growth Streak: 14 years

Travelers is actually a competitor to Berkshire Hathaway's Geico business, which Buffett has studied closely since 1951. The company insures over 6 million customers, with business and specialty insurance lines accounting for over 65% of net written premiums.

Buffett loves the insurance industry's business model. Specifically, property and casualty insurers like Travelers collect money upfront when they sell a new policy. However, until claims are made, they don't have to pay the money back. 

In the meantime, this pool of money can be invested in stocks and bonds to earn a return. So long as the insurer is skilled at risk management, in theory it should mint money.

Travelers certainly fits the bill and has proven to be a disciplined operator over the years. Throughout the last five years the firm's average combined ratio (incurred losses and expenses divided by earned premiums) sits below 100% in both its commercial and personal insurance lines, meaning they turned a profit on average before taking investment gains into account.

With such impressive scale, including being the only carrier with a top five market position in all major commercial product lines, Travelers also benefits from the vast amounts of claim data it can crunch to better price its policies. The firm can also meet more of its customers' needs, gaining greater wallet share and efficiencies. 

Thanks to these advantages, management targets a mid-teens return on equity over time, which is about double the industry average. However, the underwriting cycle is notoriously cyclical due to its high competitive intensity; anyone with enough capital can sell an insurance policy.

Travelers has shown great discipline by pulling back on growth when the industry's policy terms are unfavorable, helping preserve its profitability. 

Simply put, Travelers possesses many of the qualities Buffett likes in a business. TRV's stock declined more than 15% from its January 2018 high through early July, providing an opportunity for Berkshire to initiate a position. 

The property and casualty insurance industry faced tough times last year due to an unusually high number of natural catastrophes, but Berkshire's ground-level visibility and conviction to put some money to work in Travelers suggests better times could be ahead. 

19: Mondelez International (MDLZ)
Percent of Warren Buffett’s Portfolio: 0.01%
Dividend Yield: 2.4%   Forward P/E Ratio: 18.0x   (as of 11/15/18)
Sector: Consumer Staples   Industry: Miscellaneous Food
Dividend Growth Streak: 4 years

Kraft Foods spun off Mondelez in October 2012. Mondelez is a giant food company focused primarily on snack products (85% of sales). The company owns iconic brands such as Oreos, Ritz, Chips Ahoy, Cadbury, and Trident.

By geography, Mondelez generates around 60% of its revenue in developed markets and the remainder in emerging markets.

Berkshire Hathaway’s small position in Mondelez dates back to late 2012 when Kraft Foods completed its spin-off of the company through a stock distribution.

Warren Buffett was an existing Kraft Foods shareholder and therefore received shares of Mondelez.

Given Berkshire Hathaway’s stake in Kraft Heinz, we know that Buffett likes this type of business. It’s simple to understand, sells essential products, owns a portfolio of strong brands, generates highly predictable cash flows, and can cut costs to drive margins higher.

The global snacking market also offers plenty of room for growth. The company estimates its size at more than $1 trillion and expects growth to be driven by rising consumption in emerging markets.

With number one global market share positions in biscuits, candy, and chocolate, Mondelez should benefit over time as consumption grows.

While Mondelez is far from an exciting business, Warren Buffett’s “slow and steady” investment strategy has been a good one.

20: M&T Bank Corp. (MTB)
Percent of Warren Buffett’s Portfolio: 0.4%
Dividend Yield: 2.4%   Forward P/E Ratio: 12.0x   (as of 11/15/18)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 2 years

M&T Bank was established in 1856 and is one of America’s largest 20 commercial banks. Its 800+ domestic branches span across eight states mostly located in the eastern half of the U.S.

The company acquired Hudson City Bancorp in late 2015 for $5.2 billion, increasing its loan portfolio by nearly 30% while providing meaningful opportunities for cost savings and growth in adjacent markets.

The deal further improves M&T regulatory capital ratios, was immediately accretive to book value per share, and offers an attractive internal rate of return of about 18%.

M&T has been one of Berkshire Hathaway’s stock picks since Buffett bought preferred stock in the company back in 1991. His shares later converted into common stock about five years later.

M&T has a long history of conservative risk management practices. The company has enjoyed relatively low earnings volatility due to its careful credit underwriting and also benefits from the diversity of its operations, which include wealth and fiduciary units.

As a result, M&T has consistently outperformed its peers as measured by profitability, efficiency, and net charge-off ratios. The company has also grown its net operating earnings per share by 15% per year since 1983 and avoided posting a loss each year since 1976, steadily compounding its value along the way.

Shareholders have also been rewarded over this time period, enjoying 13% annualized dividend growth since 1983 and an annual total return north of 17% since 1980 – that’s among the 30 best returns of all U.S.-based stocks that traded publicly since 1980.

Warren Buffett likes to own the best companies in a particular industry, and M&T sure makes a strong case. The business is one of the safest banks that money can buy and has demonstrated an excellent ability to consistently grow earnings over time.

21: Bank of New York Mellon (BK)
Percent of Warren Buffett’s Portfolio: 1.8%
Dividend Yield: 2.3%   Forward P/E Ratio: 11.3x   (as of 11/15/18)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 7 years

Bank of New York Mellon was established in 1784 and provides investment management, investment services, and wealth management that help institutions and individuals manage their financial assets. BNY Mellon has over $30 trillion assets under custody and/or administration and operates in more than 100 markets.

The company’s investment management business offers a range of investment strategies (e.g. equities, fixed income, alternatives), investment vehicles (e.g. mutual funds, separate accounts), and wealth management services (e.g. estate planning, private banking).

BNY Mellon’s investment services include execution and processing of trades, servicing investments (e.g. outsource middle office functions, safekeep assets), and capital and liquidity services (e.g. optimize funding and operating capital, access global markets).

Warren Buffett’s Berkshire Hathaway bought its first shares of Bank of New York Mellon during the third quarter of 2010 and boosted his stake significantly in 2017 and 2018.

One of the reasons why Warren Buffett might have been attracted to BNY Mellon is because the company is solely focused on the investment process and the investment life cycle. As a result, the firm has amassed strong market share positions across most of its businesses.

Rivals simply have a hard time competing with BNY Mellon’s expertise surrounding complex areas such as the clearing and settlement processes for trades and general market infrastructure.

This has helped BNY Mellon build up sizable scale in its markets, enabling it to provide the most cost-effective and comprehensive services to its clients.

BNY Mellon is also conservatively managed and has consistently earned excellent ratings from all four major credit rating agencies.

The company seems very likely to remain a pillar of the world’s investment infrastructure and will continue being relevant and highly profitable for many years to come. The business also stands to benefit if interest rates normalize.

22: Bank of America (BAC)
Percent of Warren Buffett’s Portfolio: 11.7%
Dividend Yield: 2.2%   Forward P/E Ratio: 9.8x   (as of 11/15/18)
Sector: Financials   Industry: Diversified Banks
Dividend Growth Streak: 4 years

Warren Buffett became involved with Bank of America back in 2011 when he purchased $5 billion of preferred stock yielding 6% and received warrants for 700 million shares that Berkshire could exercise over the next 10 years.

Warrants are somewhat similar to stock options in that they give the holder the right to purchase shares at a specific price and by a certain date. Berkshire exercised its warrants during the third quarter of 2017, accumulating a stake in the bank worth approximately $20 billion today (around 10% of Berkshire’s total portfolio value).

Berkshire’s decision was simple after Bank of America received the Fed’s blessing to boost its common stock dividend earlier this year. While the firm was receiving roughly $300 million in dividends annually from its preferred stock, Berkshire would now make more by exercising its warrants to own the bank’s common stock.

Buffett said “Berkshire is going to keep every share for a very long time,” so the firm is clearly optimistic about Bank of America’s future, a feeling many investors didn’t share no more than six years ago.

At the time of Buffett’s investment in 2011, shareholders were worried about the bank as its legal claims and fines related to the financial crisis mounted. Buffett’s capital infusion provided a vote of confidence and helped the firm’s turnaround story under CEO Brian Moynihan gain traction.

The Wall Street Journal summarized Bank of America’s ongoing turnaround well in a recent article:

“As recently as 2014, Bank of America’s results were dogged by tens of billions of dollars in penalties over financial-crisis era issues. Since then, the company’s legal problems have eased and it has made a concerted effort to cut costs and focus on safer businesses like lending to consumers with good credit.”

Buffett is no stranger to banks and owns a number of financial services firms in Berkshire’s portfolio. As long as they manage risk well and are conservatively run, banks mint money. Bank of America made one bad decision after another leading up to the financial crisis, but Buffett is clearly a believer in its new leadership and their ongoing turnaround plans for the company.

Accelerating economic growth, higher interest rates, and strengthening property markets would also bode well for Bank of America’s profitability, especially given its cost-cutting efforts and substantial portfolio of mortgage securities.

Read More: Our Analysis of Bank of America

23: Goldman Sachs (GS)
Percent of Warren Buffett’s Portfolio: 1.9%
Dividend Yield: 1.6%   Forward P/E Ratio: 8.2x   (as of 11/15/18)
Sector: Financials   Industry: Investment Brokers
Dividend Growth Streak: 7 years

Goldman Sachs is arguably the most iconic bank on Wall Street. The company’s revenue mix is spread across equities (21%) and fixed income / currencies / commodities (17%), investment banking (23%), investment management (19%), and investing & lending (20%).

The company’s mix has gradually shifted away from fixed income / currencies / commodities, which has come under regulatory pressure targeting opaque derivatives, in favor of relatively more stable businesses such as investment management and banking.

Warren Buffett’s history with Goldman Sachs dates back to the financial crisis. Berkshire Hathaway purchased $5 billion shares of preferred stock that paid a high-yield dividend of 10%.

Buffett was able to make this opportunistic deal because credit markets were freezing up, banks needed more capital, and fear was running high – especially surrounding Wall Street Banks.

Warren Buffett also received warrants that were later converted into roughly $2 billion of Goldman Sachs’ shares.

Buffett likely believed that Goldman Sachs would retain most of its franchise value after the financial crisis and felt confident that the government’s bailout of banks would keep his investment safe.

Goldman had long been known as the premier Wall Street destination, attracting the “best of the best” talent.

The company remains the number one ranked merger advisor and equity underwriting franchise and does investing banking business with over 8,000 clients across 100 countries. The firm clearly dominates the M&A market.

While banks are still contending with a challenging regulatory and macro environment today, Goldman will remain a key player in finance for decades to come.

24: Apple (AAPL)
Percent of Warren Buffett’s Portfolio: 25.8%
Dividend Yield: 1.6%   Forward P/E Ratio: 13.9x   (as of 11/15/18)
Sector: Technology   Industry: Mini Computers
Dividend Growth Streak: 5 years

Apple sells smartphones, tablets, computers, and an assortment of software, services, and accessories. iPhones have been the biggest driver of Apple’s growth and accounted for approximately 63% of the company’s total revenue last fiscal year. Apple computers (Macs) accounted for 10% of sales, and iPads made up another 7%. Software, services, and sales of other hardware such as iPods accounted for the remaining 21% of Apple’s revenue.

Warren Buffett acquired a $1 billion stake in Apple during the first quarter of 2016 and has since increased his position to be worth more than $50 billion. Apple possesses several characteristics that Warren Buffett covets.

Most importantly, Apple owns the world’s most valuable brand. Billions of consumers and businesses alike are familiar with the Apple brand and know that it stands for quality. While consumer technologies and preferences are constantly evolving, Apple’s reputation is stellar and makes it easier for the company to enter new markets and sell to a large group of loyal followers.

Apple is also a free cash flow machine. Over the last decade, Apple’s free cash flow grew from 25 cents per share in fiscal year 2005 to $12.90 in fiscal year 2018. Throughout that period, Apple’s annual return on equity averaged an outstanding 30%.

Of course, history doesn’t repeat itself – especially in the tech sector. Much of Apple’s success was fueled by the mass adoption of smartphones. That market is now saturated, which has caused Apple’s growth to cool off and had sent its stock down nearly 30% before Berkshire stepped in.

As a result, Buffett was able to buy in to the world’s most valuable brand for less than 11 times earnings. Buffett likely didn’t buy Apple for its smartphone franchise but rather for its future growth opportunities. As usual, he is looking out a number of years while the market is focusing on Apple’s next few quarters, which will likely remain challenged due to smartphone saturation.

From self-driving cars to virtual reality, an expanding array of high-margin services, and a slew of other smart devices and software applications yet to be invented, there are numerous paths Apple can pursue for growth.

Buffett generally prefers to invest in more predictable businesses that don’t have to reinvent themselves, which makes his bet on Apple a bit surprising.

However, after tripling Berkshire’s position in the company during the first quarter of 2017 and continuing to boost his stake this year, he apparently believes that an iconic brand, a huge pile of cash on the balance sheet, and a relatively cheap valuation provide enough margin of safety to make Apple a safe bet over the next decade.

Read More: Our Analysis of Apple

25: Oracle (ORCL)
Percent of Warren Buffett’s Portfolio: 1.0%
Dividend Yield: 1.6%   Forward P/E Ratio: 14.2x   (as of 11/15/18)
Sector: Information Technology   Industry: Systems Software
Dividend Growth Streak: 5 years

The Oracle of Omaha is known for shying away from most technology companies due to their generally faster pace of change and more complicated business drivers. However, in the third quarter of 2018 that didn't stop Berkshire Hathaway from initiating a position in this software giant.

Oracle is one of two dominant players in the global enterprise software market (SAP is the other). The firm provides a range of database and middleware software, application software, cloud infrastructure software, and hardware systems to more than 400,000 business customers.

Oracle has one of the most valuable brands in the world and supplies mission-critical solutions to businesses. Its products are well integrated and save companies time and money. Switching to another solution would be costly or impractical in most cases, which provides Oracle with a large base of recurring revenue that builds over time.

However, Oracle’s market is undergoing a meaningful transition from delivering software onsite to a cloud-based delivery model. Fortunately, the company is one of the few players with the ability to deliver solutions either onsite or through the cloud.

Cloud services account for over 15% of the firm's revenue today, and the firm seems likely to continue generating substantial free cash flow and while remaining a vital partner for its customers for many years to come.

Buffett learned his lesson about the risks of cloud computing with IBM, so he seems to believe that the market is not giving Oracle enough credit for its ability to pivot its on-premise database business to the cloud.

Read More: Our Analysis of Oracle

26: American Express (AXP)
Percent of Warren Buffett’s Portfolio: 7.3%
Dividend Yield: 1.5%   Forward P/E Ratio: 13.7x   (as of 11/15/18)
Sector: Financials   Industry: Miscellaneous Services
Dividend Growth Streak: 5 years

American Express was founded in 1850 and is a financial services company best known for its credit card and travel-related services used by consumers and businesses. Over $1 trillion was billed on American Express cards last year.

American Express is one of Warren Buffett’s oldest and most successful stock picks. Buffett first invested in American Express in the mid-1960s, and the company remains one of his largest positions today.

True to his value investor roots, Buffett first purchased shares of American Express in the wake of the infamous salad oil scandal, which caused the company to incur major liabilities.

Fortunately for Buffett, he realized that the event did not impact American Express’ long-term earnings power or franchise value and snapped up 5% of the company’s shares at a bargain price.

Buffett’s fascination with the business likely starts with its powerful brand and status symbol. American Express is consistently rated as one of the most valuable brands in the world, and its cards are used in over 180 countries.

The typical American Express cardholder spends significantly more than cardholders of the company’s competitors. As a result, American Express has been able to command superior discount rates with merchants (merchants benefit from higher sales and more loyal customers when they work with AXP) and offer more attractive rewards to its cardholders (AXP reinvests its higher discount revenue from merchants).

This creates a bit of a network effect and helps American Express continue acquiring new cardholders characterized by high creditworthiness and above-average spending.

While the competitive environment has intensified and new cardholder growth has become more challenging to come by, Warren Buffett’s massive unrealized gains on his shares of American Express will likely keep him in the stock for a long time to come (his tax bill will be enormous once he sells).

27: Moody’s (MCO)
Percent of Warren Buffett’s Portfolio: 1.9%
Dividend Yield: 1.2%   Forward P/E Ratio: 18.7x   (as of 11/15/18)
Sector: Financials   Industry: Miscellaneous Services
Dividend Growth Streak: 9 years

Moody’s is a leading provider of credit ratings, research, and risk analysis services. The company’s ratings and analysis track debt that covers over 11,000 corporate issuers, 18,000 public finance issuers, and more than 64,000 structured finance obligations.

The company’s ratings and research help investors better understand the risk behind fixed-income securities they are considering buying to help markets operate more efficiently.

Warren Buffett bought his first shares of Moody’s back in 2000 around the time that the company went public.

Warren Buffett probably liked Moody’s because of its duopoly position with Standard & Poor’s (regulations have limited the number of ratings agencies), strong pricing power, well-known brand, and essential services (e.g. a company can’t issue a bond without a ratings agency).

These factors enabled Moody’s to earn extraordinary returns on capital and develop a high level of trust with clients. Barriers to entry are very high.

Following the financial crisis, there was plenty of controversy surrounding rating agencies, which placed strong ratings on bonds backed by subprime mortgages that led to the housing crisis.

As a result, substantial damage was done to their brands and they came under increased government scrutiny.

However, ratings agencies have fared much better following the financial crisis than many investors expected.

Today’s low interest rate environment has led to significant bond issuances around the world, which has helped lift their businesses.

Moody’s continues to be a free cash flow machine and looks to remain a force in the global financial markets for a long time to come.

Read More: Our Analysis of S&P (A Moody’s Rival)

28: Southwest Airlines (LUV)
Percent of Warren Buffett’s Portfolio: 1.6%
Dividend Yield: 1.2%   Forward P/E Ratio: 11.7x   (as of 11/15/18)
Sector: Transportation   Industry: Airlines
Dividend Growth Streak: 6 years

Southwest Airlines has been in business (and profitable) for more than 45 years and operates a network of 100 destinations in the U.S. and 10 other countries. The company has long differentiated itself by providing excellent customer service, treating its employees well, and offering low-cost fares, made possible by fast, no-frills service (e.g. no seat reservations, no meals, and exclusively flies one type of aircraft from Boeing).

As a result, full-service airlines can never compete with Southwest on cost, and the airline has been better able to survive the industry’s unpredictable ups and downs compared to its rivals.

Berkshire Hathaway began buying shares of Southwest during the fourth quarter of 2016, adding a fourth airline holding to its portfolio.

As we discussed above, airlines have historically been terrible investments and incredibly challenging businesses to run. From 1977 through 2009, airlines collectively lost $52 billion!

However, the times could be changing. Airlines generated $45 billion in profits from 2010 through 2015, certainly helped by the plunge in fuel prices. But we know that Buffett doesn’t make bets on short-term trends.

Given the amount of consolidation that has taken place in the airline industry over the last decade (the four largest carriers control over 80% of U.S. domestic capacity), Buffett likely believes “this time is different.”

With more power resting in fewer hands, the airline industry could finally become a more rational and profitable market for the long term. Many investors are biased against the industry given its checkered history, potentially setting up a great investment opportunity. Buffett’s smattering of bets on four different airlines seems to indicate he is bullish on the entire space rather than a single operator.

Remember the last part of Warren Buffett’s quote that we reference above:

“If [the airline industry] ever gets down to one airline it will be a wonderful business…”

Perhaps this time really could be different.

29: American Airlines (AAL)
Percent of Warren Buffett’s Portfolio: 0.8%
Dividend Yield: 1.1%   Forward P/E Ratio: 7.5x   (as of 11/15/18)
Sector: Transportation   Industry: Airlines
Dividend Growth Streak: 0 years

American Airlines was formed in December 2013 as a result of the merger between American Airlines and US Airways Group. The company operates an average of 6,700 flights per day to nearly 350 destinations in more than 50 countries. With over $40 billion in revenue in 2016, American Airlines is one of the largest airlines in the world. The company’s roots can be traced back to the 1930s.

Operating airlines is a tough business. In fact, American Airlines declared bankruptcy not too long ago in 2011. Southwest (LUV) and JetBlue (JBLU) are the only two major airlines that have not filed for bankruptcy.

Volatile fuel prices, costly union labor forces, steep price competition, and capital intensive operations are just some of the major challenges faced by airlines. There is a small silver lining, however.

The high costs required to operate an airline create barriers to entry. A large operator such as American Airlines can spread its fixed costs across all of its routes, allowing it to deliver it services more efficiently than smaller rivals or new entrants. Only so many routes between two destinations are needed, too, making it all the more difficult for a new player to gain share.

The big operators have consolidated in recent years as well. Delta Air and Northwest Airlines merged in 2008, United and Continental combined forces in 2010, and of course American Airlines and US Airways Group merged in 2013.

According to the Wall Street Journal, American, United Continental, Delta Air Lines, and Southwest now control more than 80% of U.S. domestic capacity, up significantly from five years ago prior to the merger consolidation activity.

It remains to be seen if this consolidation can result in a more rational competitive environment, marked by higher ticket prices and improved profitability from economies of scale and restructuring initiatives.

Berkshire Hathaway began buying shares of American Airlines in the third quarter of 2016. The firm was likely attracted to American’s strong domestic and international hub structure. Since American’s routes are generally longer, they can charge more per mile and keep their planes better utilized.

Economies of scale, coupled with American’s strong international presence and the industry’s consolidation, are possible reasons for Berkshire’s interest. Airlines still fall in the “too hard” bucket for me.

30: Costco (COST)
Percent of Warren Buffett’s Portfolio: 0.5%
Dividend Yield: 1.0%   Forward P/E Ratio: 30.1x   (as of 11/15/18)
Sector: Consumer Discretionary   Industry: Discount Retail
Dividend Growth Streak: 14 years

Costco started in 1983 and is the largest wholesale-club retailer in the country. The company operates large membership warehouses that offer members reasonably low prices on an assortment of products covering categories such as groceries, electronics, apparel, and more.

Costco has been one of Warren Buffett’s stock picks since 2000. Berkshire Hathaway scooped up shares after the stock plunged by nearly 40% during the year.

Buffett was very familiar with the company as Berkshire’s vice chairman, Charlie Munger, served on Costco’s board in the late 1990s.

Warren Buffett was likely attracted to Costco because of its low-cost producer status, reputation for quality, and loyal customer base.

Costco’s advantages begin with its 80 million cardholders (a membership card is required to shop at Costco). The company’s large group of customers provides Costco with excellent purchasing power over its suppliers, helping keep prices below traditional wholesale or retail outlets.

Management also keeps the company focused on providing excellent value by eliminating as many frills and costs as possible. Costco stores are far from extravagant on the inside and even eliminate the use of bags at checkout to save money and price their products lower.

The assortment of products at Costco is also unique. Many of its products are exclusive, and customers really can’t find the same mix of quantity, quality, and value anywhere else. This has helped Costco continue its strong growth despite increased competition from e-commerce players such as Amazon.

As a result of its low prices, quality merchandise, and simple shopping experience, Costco’s membership renewal rate has been excellent at around 90%.

What’s held Buffett back from buying more of this wonderful business? Unlike its products, the stock rarely looks like a bargain.

In hindsight, Berkshire surely wishes it had loaded up on more shares of Costco back in 2000.

Read More: Our Analysis of Costco

31: Sirius XM Holdings (SIRI)
Percent of Warren Buffett’s Portfolio: 0.4%
Dividend Yield: 0.8%   Forward P/E Ratio: 24.0x   (as of 11/15/18)
Sector: Consumer Discretionary   Industry: Radio & TV Broadcasting
Dividend Growth Streak: 2 years

Sirius is a satellite radio company and was founded in 1990. The company makes money by transmitting a number of premium satellite radio channels on a subscription fee basis to its more than 32 million subscribers. Its content covers everything from sports, music, and entertainment to weather, news, comedy, and traffic. 

Berkshire Hathaway initiated a position in Sirius during the fourth quarter of 2016, but his familiarity with the company dates back much further. Sirius is controlled by Liberty Media Corporation, a company Buffett is also invested in.

Sirius is a remarkably profitable and stable business that throws off gobs of free cash flow. The company earned an operating margin near 30% last year and grew free cash flow per share by 50%. Sales have compounded by 10.7% annually over the last five years as well.

What is the key to Sirius’s successful business model? A base of more than 30 million paying subscribers generates healthy recurring revenue, and every incremental subscriber has a high incremental margin. In other words, it doesn’t cost Sirius much to add a new customer, dropping much of the new revenue straight to the company’s bottom line and increasing margins over time.

Sirius has long-term distribution relationships with every major automaker, including General Motors (another Buffett stock). In fact, the company’s satellite radios are available in more than 75% of new cars, and most automakers include a subscription to Sirius’s radio service in the sale of lease of their new vehicles.

As penetration rates continue creeping higher and auto sales grow, Sirius’s business will continue expanding. Breaking into Sirius’s relationships with automakers would be extremely difficult, protecting the company. While the rise of digital music services such as Pandora could pose a threat to satellite radio as cars become more connected, Sirius also has its own internet radio service to help it remain relevant.

Warren Buffett loves investing in companies that dominate their markets, generate predictable free cash flow, and have numerous opportunities for long-term earnings growth. Sirius certainly seems to fit this profile.

Investors should note that Sirius only began paying quarterly dividends in November 2016. 

32: Torchmark Corporation (TMK)
Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 0.7%   Forward P/E Ratio: 14.0x   (as of 11/15/18)
Sector: Financials   Industry: Life Insurance
Dividend Growth Streak: 12 years

Torchmark is a major provider of life and health insurance products. The company primarily distributes its insurance products through exclusive agency and direct response marketing channels and targets the middle-income market.

Like many other Berkshire Hathaway holdings, Torchmark is a low-cost operator in its market and earns very high underwriting margins in the industry. The business runs very lean and is able to spread its costs and risks over its base of more than $3 billion of annualized life and health premiums in force.

Warren Buffett’s stake in Torchmark dates back more than 15 years, and Buffett is no stranger to insurers. After all, one of his most legendary investments ever was Geico.

The insurance business model is an enticing one because insurers receive money upfront when they write new policies, but they don’t have to pay the money back until claims are made.

In the meantime, they can invest policy premiums in bonds and stocks to earn a return. As long as the insurance company is savvy and conservative when it comes to risk management, they can mint money.

Torchmark is indeed conservative and invests primarily in investment grade fixed-maturity assets. Since the company’s insurance underwriting margins are so strong, the company does not need to pursue an aggressive investment strategy.

The company’s free cash flows are also remarkably resilient. About 90% of Torchmark’s revenue each year is generated by policies that were sold in prior years, helping it generate cash in virtually any environment.

As a testament to its sturdiness, Torchmark generated a double-digit return on equity throughout the financial crisis.

Torchmark seems likely to remain in Berkshire Hathaway’s portfolio for a long time to come as it continues compounding its earnings.

Read More: Analyzing Insurance Provider Aflac

33: Visa (V)
Percent of Warren Buffett’s Portfolio: 0.7%
Dividend Yield: 0.7%   Forward P/E Ratio: 26.2x   (as of 11/15/18)
Sector: Business Services   Industry: Financial Transaction Services
Dividend Growth Streak: 10 years

Visa is a global payments technology business that enables consumers and businesses to make electronic payments. The company’s processing network handles the authorization, clearing, and settlement of payment transactions around the globe.

Visa has over 300 million cards in circulation and is number one in credit card and debit card networks based on purchase volumes.

Visa makes money by collecting a fee every time one of its cards is used to complete a transaction. Unlike banks, Visa doesn’t issue cards or take on any credit risk. It just collects fees not unlike a toll taker.

Berkshire Hathaway first bought Visa shares in late 2011. As a long-term investor, Warren Buffett and his team are thinking about what Visa looks like at least 10 years from now. 

They are most likely encouraged by the fact that cash transactions still account for the far majority of total transactions around the world.

Just like MasterCard, the number of Visa credit and debit cards in circulation should rise over time as payments are increasingly made electronically.

More cards in circulation mean more transactions, driving earnings higher for Visa. So long as Visa’s processing network remains dominant, the company’s future looks bright.

Read More: Our Analysis of Visa

34: MasterCard (MA)
Percent of Warren Buffett’s Portfolio: 0.5%
Dividend Yield: 0.5%   Forward P/E Ratio: 27.4x   (as of 11/15/18)
Sector: Business Services   Industry: Financial Transaction Services
Dividend Growth Streak: 7 years

MasterCard operates the second biggest payments network after Visa and enables business and consumers to use electronic payments instead of cash and checks.

The company makes money by charging fees to card issuers and acquirers for using its transaction processing services. MasterCard collects a fee based on the number and value of transactions completed using its branded cards.

Berkshire initiated his stake in MasterCard in early 2011 and was likely attracted to the company for several reasons, including its dominant market position.

First, MasterCard generates outstanding returns on invested capital, which is usually a sign of a strong economic moat. The business has earned at least a 35% return on invested capital in each of the last five years and maintains an operating margin in excess of 50%. Not surprisingly, MasterCard is an excellent free cash flow generator.

The company’s business model is appealing because the company essentially operates as a toll taker, collecting a fee every time a transaction is completed using one of its cards. Importantly, MasterCard does not have to worry about credit risk, which is taken on by the banks backing the credit card.

With over 80% of the world’s transactions still conducted using cash, there is presumably an extremely long runway for MasterCard’s credit cards to continue growing in use. As more transactions take place using its cards, the company’s profits will rise.

Closing Thoughts

Studying Warren Buffett’s stock picks can give us new ideas for our own portfolios and also reinforces sound investing principles to follow.

By remaining focused on simple, high quality businesses trading at reasonable prices, we can construct a sound dividend portfolio that can deliver safe, growing dividend income for years to come.

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