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Warren Buffett's Dividend Portfolio

Warren Buffett’s Berkshire Hathaway outperformed the S&P 500 by 10.8% per year from 1965 through 2018, generating an overall gain of 2,472,627% compared to the market’s total return of 15,019%.

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. 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 Thursday, November 14, 2019, new information was released about Berkshire Hathaway’s portfolio. Most quarters are fairly uneventful for the Oracle of Omaha, and that largely held true during the third quarter of 2019.

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.

Notable Additions
Berkshire invested over $500 billion during the third quarter, picking up new positions in Restoration Hardware (RH) and Occidental Petroleum (OXY). The firm didn't add to any of its existing positions, though.

Restoration Hardware doesn't pay a dividend but is a disruptor in the luxury home furnishings market. The company embraces a membership model rather than running promotions, maintains elaborate showrooms, and believes it can compound its earnings 15% to 20% annually for the next 10 years.

Warren Buffett's involvement in the furniture industry spans decades, including his 1983 purchase of a majority ownership stake in Nebraska Furniture Mart. He likely sees potential in Restoration Hardware's unique retail strategy and believes the business has developed an enduring brand that will fuel profitable long-term growth for longer than the market is pricing in.

Buffett's $330 million investment in Oxy's common shares is relatively small compared to the $10 billion investment he made in the energy giant's preferred stock in April 2019.

Investors have hammered Oxy's shares due to concerns about the company's pricey takeover of Anadarko, as well as the weak energy environment. Buffett seems to be a believer in U.S. shale and the price of oil improving in the long term.

Notable Reductions
During the third quarter, Berkshire Hathaway made several sales as well. The firm exited its stake in Red Hat (RHT), which was acquired by IBM. Berkshire also trimmed its positions in Sirius XM (-1% change in shares) and Apple (-0.4%), but these were very small moves that probably shouldn't be scrutinized.

Similarly, Buffett sold some more shares of Wells Fargo (-7%) but only to keep Berkshire's position below the 10% ownership threshold allowed by regulators. 

Finally, the firm continued trimming back its position in Phillips 66 (-6%), which represents just 0.25% of Buffett's stock portfolio. Berkshire began reducing this investment in 2018 due to regulatory requirements that came with ownership levels above 10%. 

However, it appears Buffett may be exiting Phillips 66 and the refinery space as he puts more focus on his new energy bet, Oxy. Refining margins typically benefit from a low price of oil, while shale producers like Oxy get hurt. Buffett's shift in the energy space suggests he may believe oil prices are likely to head higher from here, and the market is not reflecting that likelihood in Oxy's price.

At the end of September 2019, Warren Buffett owned a total of 47 publicly-traded stocks. Interestingly enough, 33 of these holdings pay a dividend, and several of them have yields near 4% or higher.

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 three 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: Occidental Petroleum (OXY)
Percent of Warren Buffett’s Portfolio: 0.2%
Dividend Yield: 8.1%   Forward P/E Ratio: 36.0x   (as of 11/18/19)
Sector: Energy   Industry: Integrated Oil and Gas
Dividend Growth Streak: 16 years

Warren Buffett became involved with Oxy in April 2019 when Berkshire Hathaway agreed to invest $10 billion in preferred stock paying 8% to help the firm finance its $38 billion acquisition of Anadarko.

Many Oxy investors felt the company paid a steep price for this controversial purchase, further exacerbated by the costly preferred stock issued to Berkshire. In the third quarter of 2019 Buffett increased his involvement with Oxy, buying about 1% of the firm's common stock.

Following its acquisition of Anadarko, Oxy is one of the largest oil & gas producers in America, with leading positions across key shale basins. As Warren Buffett has said, owning Oxy is essentially a bet on the price of oil and the long-term growth of the Permian basin.

Oxy's cash flow is very sensitive to the price of oil, and the company is saddled with debt following its Anadarko deal. As a result, the stock will likely remain highly volatile until the firm's balance sheet strengthens and the price of oil improves.

2: Kraft Heinz (KHC)
Percent of Warren Buffett’s Portfolio: 4.2%
Dividend Yield: 5.1%   Forward P/E Ratio: 12.0x   (as of 11/18/19)
Sector: Consumer Staples   Industry: Miscellaneous Food
Dividend Growth Streak: 0 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 Berkshire Hathaway and 3G Capital, a private equity firm, teamed up to take Heinz private in 2013 and later acquired Kraft Foods in 2015. 

Kraft and Heinz 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.
Source: Kraft Heinz
Warren Buffett’s stake in Kraft Heinz was largely a play on owning a business with durable and proven brands that were expected to continue growing over time. Combined with ongoing cost cuts, margin expansion was expected to deliver nice profit growth over the coming years, too.

Here is what Warren Buffett initially 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 KHC seemed like another Buffett stock that could be boring and predictable for long-term income investors, several of Kraft Heinz's major brands struggled to adapt their portfolios to the healthier eating trend.

The firm's struggles came to a head in February 2019, when management decided to cut Kraft Heinz's dividend to accelerate deleveraging efforts.

As Warren Buffett summarized in an interview with CNBC, he "was wrong in a couple of ways about Kraft Heinz" and ultimately overpaid for the business as its pricing power deteriorated unexpectedly: 

"When you're going toe to toe with a Walmart or a Costco or maybe an Amazon pretty soon...you've got the weaker bargaining hand than you did 10 years ago...

Costco introduced the Kirkland brand in 1992, 27 years ago, and that brand did $39 billion last year whereas all the Kraft and Heinz brands did $27, $26 or $27 billion.

So here they are, a hundred years plus, tons of advertising, built into people’s habits and everything else, and now Kirkland, a private label brand, comes along and with only 750 or so outlets does 50% more business than all the Kraft-Heinz brands.

So house brands, private label, is getting stronger. It varies by country around the world, but it’s bigger. And it’s gonna keep getting bigger." 

We reviewed where Kraft Heinz and its dividend might go from here in our investment thesis linked below.

Read More: Our Analysis of Kraft Heinz

3: General Motors (GM)
Percent of Warren Buffett’s Portfolio: 1.3%
Dividend Yield: 4.2%   Forward P/E Ratio: 7.4x   (as of 11/18/19)
Sector: Consumer Discretionary   Industry: Domestic Auto Manufacturers
Dividend Growth Streak: 0 years

General Motors is one of biggest manufacturers of cars and trucks in the world. Most of the company's sales are pickup trucks and crossovers, which carry higher margins than passenger cars. 

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, over 80% 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 (about 15% of firm-wide income) and number one by volume.
Source: General Motors
Berkshire Hathaway bought its initial stake in General Motors in early 2012 and last increased its position by 37% during the fourth 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 probably likes General Motors’ valuation, too. The company trades at a single-digit price-to-earnings multiple and has a dividend yield around 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: Suncor (SU)
Percent of Warren Buffett’s Portfolio: 0.2%
Dividend Yield: 4.0%   Forward P/E Ratio: 14.6x   (as of 11/18/19)
Sector: Energy   Industry: Integrated Oil & Gas
Dividend Growth Streak: 16 years

SU is an integrated energy company focused on developing Canada’s oil sands. Oil sands is a mixture of bitumen, sand, fine clays, silts, and water. Because it does not flow like conventional crude oil, it must be mined or heated underground before it can be processed.

Since pioneering the first crude oil production from the oil sands of northern Alberta in 1967, Suncor has grown to become one of Canada’s largest integrated energy companies with a balanced portfolio of high quality assets.

In addition to its upstream exploration and production activities, the firm generates a substantial amount of its profits from midstream and downstream (refining & marketing) operations, which include a handful of refineries, lubricants and ethanol plants, and Petro-Canada retail gasoline stations. This integrated portfolio helps provide solid profits even when the price of oil is weak. 

Berkshire Hathaway first bought into Suncor in 2013, investing around $500 million at the time. Buffett owned Suncor during a period of aggressive production growth marked by a series of acquisitions. Suncor then changed its plans to focus more on returning capital to shareholders in the form of higher dividends and share buybacks. Berkshire exited its entire stake in 2016.

However, during the fourth quarter of 2018, Suncor's stock price plunged to its lowest level since 2016. Berkshire pounced on the opportunity to get back into a business it knows very well at a price it liked. 

Suncor is one of the most conservatively managed energy producers, but only time will tell if Berkshire is making a long-term commitment here or simply saw an opportunity to capitalize on overly pessimistic investors pushing SU's valuation too low. 

5: Wells Fargo (WFC)
Percent of Warren Buffett’s Portfolio: 8.9%
Dividend Yield: 3.8%   Forward P/E Ratio: 12.5x   (as of 11/18/19)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 9 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 and noninterest income 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 nearly 10% 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 as of the end of 2018.

Wells Fargo pays very little 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 couple trims of his position 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 the firm 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.

Wells Fargo hired a new CEO in September 2019, and our analysis linked to below touches more on the sales scandal that has shaken the company.

Read More: Our Analysis of Wells Fargo 

6: STORE Capital (STOR)
Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 3.5%   Forward P/AFFO Ratio: 19.7x   (as of 11/18/19)
Sector: Real Estate   Industry: Retail REIT
Dividend Growth Streak: 5 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 0.3% of Buffett’s portfolio, Berkshire owns approximately 8.7% 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 65% of its rental income, followed by retail (e.g. furniture stores, home goods, outdoor outfitters, hobby centers) at 18% and manufacturing (e.g. playground equipment, medical devices, aerospace components) at 17%.

With at least a 99% occupancy rate since its 2014 IPO, a 10-plus year average remaining lease contract term, and nearly 2% 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 2,200 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

7: Phillips 66 (PSX)
Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 3.1%   Forward P/E Ratio: 10.9x   (as of 11/18/19)
Sector: Energy   Industry: Oil Refining & Marketing
Dividend Growth Streak: 7 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 benefits from a drop in oil prices because oil is a major input cost for its refining operations. As a result, the company’s refining operations enjoyed several strong years of profit increases following the oil crash.

However, Warren Buffett doesn’t buy stocks for short-term profits. In the case of Phillips 66, Berkshire Hathaway was 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 seems likely to benefit from growing North American energy production and see their collective earnings power rise. 

However, Berkshire continues exiting its stake in Phillips 66 while making a substantial investment in Oxy. Buffett may believe oil and gas producers provide better value in today's volatile energy environment.

Read More: Our Analysis of Phillips 66

8: United Parcel Service (UPS)
Percent of Warren Buffett’s Portfolio: 0.01%
Dividend Yield: 3.1%   Forward P/E Ratio: 15.5x   (as of 11/18/19)
Sector: Industrials   Industry: Air Freight Transport
Dividend Growth Streak: 10 years

United Parcel Services was founded in 1907 and has grown to become the largest package delivery company in the world. In fact, UPS delivers 20 million packages and documents each day to around 10 million customers located in more than 220 countries and territories.

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. The company has invested heavily to build out its network over the years.
Source: UPS Investor Presentation
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 120,000 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 annual dividend growth of about 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

9: Coca-Cola (KO)
Percent of Warren Buffett’s Portfolio: 10.1%
Dividend Yield: 3.0%   Forward P/E Ratio: 24.0x   (as of 11/18/19)
Sector: Consumer Staples   Industry: Soft Drinks
Dividend Growth Streak: 57 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 over 4,000 different beverages. Over 20 of its brands generate over $1 billion in sales each, and sparkling beverages represent just under 70% of unit sales.
Source: Coca-Cola Investor Presentation
Coke is also a very global company, with less than 40% 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 

10: Restaurant Brands (QSR)
Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 3.0%   Forward P/E Ratio: 23.2x   (as of 11/18/19)
Sector: Consumer Discretionary   Industry: Food & Restaurants
Dividend Growth Streak: 5 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.

11: PNC Financial Services (PNC)
Percent of Warren Buffett’s Portfolio: 0.6%
Dividend Yield: 3.0%   Forward P/E Ratio: 13.1x   (as of 11/18/19)
Sector: Financials   Industry: Regional Banks
Dividend Growth Streak: 9 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.

12: U.S. Bancorp (USB)
Percent of Warren Buffett’s Portfolio: 3.4%
Dividend Yield: 2.8%   Forward P/E Ratio: 13.6x   (as of 11/18/19)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 9 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 32% of its net income from consumer and small business banking, 21% from payment services, 23% from wholesale banking and commercial real estate, 13% from treasury and corporate support, and 11% from wealth management and securities services. 

Overall, fee income accounted for 42% of total revenue in 2018. 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 volatile 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.

13: JPMorgan Chase (JPM)
Percent of Warren Buffett’s Portfolio: 3.3%
Dividend Yield: 2.8%   Forward P/E Ratio: 12.6x   (as of 11/18/19)
Sector: Financials   Industry: Diversified Banks
Dividend Growth Streak: 9 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%).
Source: JPMorgan Investor Presentation

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 and early 2019, 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

14: Johnson & Johnson (JNJ)
Percent of Warren Buffett’s Portfolio: 0.02%
Dividend Yield: 2.8%   Forward P/E Ratio: 15.6x   (as of 11/18/19)
Sector: Medical   Industry: Pharma
Dividend Growth Streak: 57 years

Johnson & Johnson is one of the biggest healthcare companies in the world with over $80 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 70% of its sales are from number one or number two market share positions. 

Across all three business segments, Johnson & Johnson has a total of 26 drugs and product platforms which each generate over $1 billion in sales, giving it the diversification it needs to generate consistent free cash flow and steadily grow its dividend. 
Source: J&J Investor Presentation
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, and the string of lawsuits weighing on J&J seem very unlikely to threaten the firm's dividend.

Read More: Our Analysis of Johnson & Johnson

15: Delta Air Lines (DAL)
Percent of Warren Buffett’s Portfolio: 1.9%
Dividend Yield: 2.8%   Forward P/E Ratio: 8.2x   (as of 11/18/19)
Sector: Transportation   Industry: Airlines
Dividend Growth Streak: 6 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.

16: Bank of New York Mellon (BK)
Percent of Warren Buffett’s Portfolio: 1.7%
Dividend Yield: 2.6%   Forward P/E Ratio: 11.9x   (as of 11/18/19)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 9 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.

17: M&T Bank (MTB)
Percent of Warren Buffett’s Portfolio: 0.4%
Dividend Yield: 2.5%   Forward P/E Ratio: 12.0x   (as of 11/18/19)
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-plus 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.

18: Procter & Gamble (PG)
Percent of Warren Buffett’s Portfolio: 0.02%
Dividend Yield: 2.4%   Forward P/E Ratio: 24.3x   (as of 11/18/19)
Sector: Consumer Staples   Industry: Soap & Cleaning Preparations
Dividend Growth Streak: 62 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.
Source: Procter & Gamble
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.

The deal closed in 2016, so 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

19: Synchrony Financial (SYF)
Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 2.4%   Forward P/E Ratio: 8.3x   (as of 11/18/19)
Sector: Financials   Industry: Consumer Loans
Dividend Growth Streak: 3 years

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.

20: Travelers Companies (TRV)
Percent of Warren Buffett’s Portfolio: 0.4%
Dividend Yield: 2.4%   Forward P/E Ratio: 12.8x   (as of 11/18/19)
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 2018, 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.

21: Goldman Sachs (GS)
Percent of Warren Buffett’s Portfolio: 1.8%
Dividend Yield: 2.3%   Forward P/E Ratio: 9.3x   (as of 11/18/19)
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.

22: Bank of America (BAC)
Percent of Warren Buffett’s Portfolio: 12.4%
Dividend Yield: 2.2%   Forward P/E Ratio: 11.2x   (as of 11/18/19)
Sector: Financials   Industry: Diversified Banks
Dividend Growth Streak: 6 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 2017 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: Mondelez International (MDLZ)
Percent of Warren Buffett’s Portfolio: 0.01%
Dividend Yield: 2.1%   Forward P/E Ratio: 20.8x   (as of 11/18/19)
Sector: Consumer Staples   Industry: Miscellaneous Food
Dividend Growth Streak: 6 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.

24: American Express (AXP)
Percent of Warren Buffett’s Portfolio: 8.3%
Dividend Yield: 1.4%   Forward P/E Ratio: 13.7x   (as of 11/18/19)
Sector: Financials   Industry: Miscellaneous Services
Dividend Growth Streak: 8 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).

25: Southwest Airlines (LUV)
Percent of Warren Buffett’s Portfolio: 1.4%
Dividend Yield: 1.3%   Forward P/E Ratio: 12.3x   (as of 11/18/19)
Sector: Transportation   Industry: Airlines
Dividend Growth Streak: 8 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.

26: American Airlines (AAL)
Percent of Warren Buffett’s Portfolio: 0.6%
Dividend Yield: 1.4%   Forward P/E Ratio: 5.4x   (as of 11/18/19)
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 annual revenue, 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.

27: Apple (AAPL)
Percent of Warren Buffett’s Portfolio: 25.9%
Dividend Yield: 1.2%   Forward P/E Ratio: 20.2x   (as of 11/18/19)
Sector: Technology   Industry: Mini Computers
Dividend Growth Streak: 7 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.
Source: Apple
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 $12.80 in fiscal year 2019. 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 throughout 2018, 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 

28: Costco (COST)
Percent of Warren Buffett’s Portfolio: 0.6%
Dividend Yield: 0.9%   Forward P/E Ratio: 35.4x   (as of 11/18/19)
Sector: Consumer Discretionary   Industry: Discount Retail
Dividend Growth Streak: 15 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

29: Moody’s (MCO)
Percent of Warren Buffett’s Portfolio: 2.4%
Dividend Yield: 0.9%   Forward P/E Ratio: 25.3x   (as of 11/18/19)
Sector: Financials   Industry: Miscellaneous Services
Dividend Growth Streak: 10 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)

30: Sirius XM (SIRI)
Percent of Warren Buffett’s Portfolio: 0.4%
Dividend Yield: 0.8%   Forward P/E Ratio: 30.3x   (as of 11/18/19)
Sector: Consumer Discretionary   Industry: Radio & TV Broadcasting
Dividend Growth Streak: 3 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 34 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. 

31: Globe Life (GL)
Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 0.7%   Forward P/E Ratio: 14.1x   (as of 11/18/19)
Sector: Financials   Industry: Life Insurance
Dividend Growth Streak: 14 years

Globe Life, formerly known as 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, Globe Life 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 Globe Life 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.

Globe Life 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 Globe Life'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, Globe Life generated a double-digit return on equity throughout the financial crisis.

Globe Life 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

32: Visa (V)
Percent of Warren Buffett’s Portfolio: 0.8%
Dividend Yield: 0.7%   Forward P/E Ratio: 28.9x   (as of 11/18/19)
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

33: MasterCard (MA)
Percent of Warren Buffett’s Portfolio: 0.6%
Dividend Yield: 0.5%   Forward P/E Ratio: 32.6x   (as of 11/18/19)
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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