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Warren Buffett’s Top 20 Stocks


Published by Nick McCullum on May 23rd, 2017

To invest in great businesses, you have to find them first.

That’s where Warren Buffett comes in…

Warren Buffett’s portfolio is filled with quality high dividend stocks.

You can ‘cheat’ off of Warren Buffett’s own picks to find high quality dividend stocks for your portfolio.  That’s because Buffett (and other institutional investors) are required to periodically show their holdings in a ’13F Filing’.
 

Free Excel Download: Get a free Excel Spreadsheet of all 47 of Warren Buffett’s stocks, complete with metrics that matter – including P/E ratio and dividend yield. Click here to download Buffett’s holdings now.

This article analyzes Warren Buffett’s top 20 stocks based on information disclosed in his newest 13F filing.

How To Use Warren Buffett’s Portfolio To Find Investment Ideas

Having a database of Warren Buffett’s top stocks is more powerful when you have the ability to filter it based on important investing metrics.

That’s why this article’s Excel download is so useful…

It allows you to search Warren Buffett’s portfolio to find dividend investment ideas that match your specific portfolio.

For those of you unfamiliar with Excel, this section will show you how to filter Warren Buffett’s portfolio for two important investing metrics – price-to-earnings ratio and dividend yield.

Step 1: Click on the filter icon in the column for dividend yield or price-to-earnings ratio.

Warren Buffett's Top Stocks Excel Screenshot 1

Step 2: Filter each metric to find high-quality stocks. Two examples are provided below.

Example 1: To find stocks with dividend yields above 1% and list them in descending order, click the ‘Dividend Yield’ filter and do the following:

Warren Buffett's Top Stocks Excel Screenshot 2

Example 2: To find stocks with price-to-earnings ratios below 25 and list them in descending order, click the ‘Price-to-Earnings Ratio’ filter and do the following:

Warren Buffett's Top Stocks Excel Screenshot Additional Example

Table of Contents

You can skip to an analysis of any of Warren Buffett’s 20 top stock holdings with the table of contents below.  Stocks are listed in order from smallest percentage of Buffett’s portfolio to largest percentage of Buffett’s portfolio.

Warren Buffett & Dividend Stocks

Buffett has grown his wealth by investing in and acquiring businesses with strong competitive advantages trading at fair or better prices.
 

Free Bonus Section: Benefit from 4 simple tools to help you invest like Warren Buffett. Click here to download the 4 tools now.

Most investors know Warren Buffett looks for quality, but few know the degree to which he invests in dividend stocks:

Warren Buffett prefers to invest in shareholder friendly businesses with long track records of success.

Warren Buffett’s Recent Investment Activity

Warren Buffett’s most recent 13F filing was much less busy than his prior filing, where he disclosed large stakes in Apple and the four large U.S. airlines.

Buffett’s first quarter 13F reported three notable activities.

First, Buffett substantially increased his position in Apple. The Oracle of Omaha’s investment portfolio now contains 129,357,106 shares of Apple with a market value of $18.6 billion. Apple is 11.5% of Berkshire Hathaway’s common stock portfolio and is his third largest individual stock position.

Secondly, Buffett has noticeably reduced his stake in IBM. Buffett initially purchased IBM in 2011, and has stated publicly that he has trimmed his position by approximately one-third. Buffett’s IBM stake has been trimmed to $11.2 billion, or 7% of the company’s total investment portfolio.

Lastly, Buffett has upped his stake in the Bank of New York Mellon Corporation by 52%. While it is impossible to know exactly what Buffett was thinking when he accumulated more BNY Mellon stock, it is possible that this trade is a play on rising domestic interest rates. Buffett’s BNY Mellon position now sits at $1.6 billion, or 1% of the total investment portfolio.

Moving on, Warren Buffett’s top 20 stock positions will now be analyzed in detail.

#20 – VeriSign, Inc. (VRSN)

Dividend Yield: N/A (VeriSign does not pay a regular dividend)
Adjusted Price-to-Earnings Ratio: 24.7
Percent of Warren Buffett’s Portfolio: 0.7%
10 Year Total Return CAGR: 14.6%

Berkshire Hathaway owns 12,952,745 shares of VeriSign, Inc. (VRSN) with a cumulative market value of $1.1 billion.

VeriSign is a worldwide leader in domain name registry services and internet security. The company was founded in 1995 by James Bidzos (who still serves as its President, CEO, and Chairman) and has grown to a market capitalization of $9.1 billion. VeriSign is headquartered in Reston, Virginia.

The bulk of VeriSign’s business is in domain name registry services. VeriSign manages a domain name base of more than 140 million, which includes both .com and .net names.

VRSN Verisign Registry Services Highlights 1

Source: VeriSign First Quarter Investor Presentation, slide 4

VeriSign’s domain name registry database is growing.

The company recorded 9.5 million new name registrations in the first quarter of 2017 and benefits from a renewal rate of more than 65%.

More details about VeriSign’s domain name registry business can be seen in the following slide.

VRSN Verisign Registry Services Highlights 2

Source: VeriSign First Quarter Investor Presentation, slide 5

VeriSign is in the business of managing internet data, registering domain names, and providing internet security services.

This is a very capital-light business (which is something that Warren Buffett is known to search for among his investments). After considering VeriSign’s business model, it should not be surprising that the company has sky-high profit margins.

VeriSign reported GAAP operating margin of 60.7% in the first quarter of 2017, and non-GAAP operating margin of 65.1%. The company generates this performance from a relatively small employee base (984 full-time employees at the end of the last quarter) which helps to keep its salary expenses low in the high-paying internet sector.

VRSN Verisign Q1 2017 Financial Performance

Source: VeriSign First Quarter Investor Presentation, slide 6

Looking ahead, VeriSign expects its high levels of profitability to continue.

The company is anticipating non-GAAP operating margin of 64.5%-65.25% for the full year of fiscal 2017.

Further, the company is expecting revenues of $1.145-$1.160 billion, which means its current $9.1 billion market capitalization is priced at a price-to-sales ratio of ~8. This high price-to-sales ratio is another telltale sign of a high-margin, capital-light business model.

VRSN Verisign Financial Guidance

Source: VeriSign First Quarter Investor Presentation, slide 7

VeriSign is unlike most companies that are covered on Sure Dividend because the company does not pay a regular quarterly dividend.

However, the company did pay a special one-time dividend on its common stock in both 2010 and 2011, which suggests that management may be open to initiating a regular distribution at some point in the future.

Verisign reported adjusted earnings-per-share of $3.61 in fiscal 2016. The company’s current stock price of $89.19 represents a 24.7x multiple of 2016’s adjusted earnings-per-share.

With a valuation of ~25, VeriSign is trading at a valuation similar to the rest of the stock market (on average). VeriSign’s lack of dividend payments and average valuation means that investors can likely find better investment opportunities elsewhere on this list.

#19 – USG Corporation (USG)

Dividend Yield: N/A (USG does not currently pay a quarterly dividend)
Adjusted Price-to-Earnings Ratio: 16.8
Percent of Warren Buffett’s Portfolio: 0.8%
10 Year Total Return CAGR: -5.1%

Berkshire Hathaway owns 39,002,016 shares of USG Corporation (USG) with an aggregate market value of $1.2 billion. Berkshire became USG’s largest shareholder in 2013 when it exercised its position of USG convertible bonds acquired in 2008.

USG – also known as United States Gypsum – is a domestic manufacturer of construction materials. Most notably, USG manufactures drywall and joint compounds and is the largest manufacturer of wallboard in the United States.

USG was founded in 1901 and has grown to a market capitalization of $4.2 billion. USG is headquartered in Chicago and is one of the smaller companies (by market capitalization) in Warren Buffett’s investment portfolio.

With that said, USG is far from a small business. The company generates more than $700 million in quarterly net sales and $100 million in quarterly operating profit.

USG Corporation Q1 2017 Highlights

Source: USG Corporation First Quarter Investor Presentation, slide 5

As a manufacturer of construction materials, USG operates what Warren Buffett calls a ‘commodity business’ – one where the single largest differentiator between competitors is the price of their products or services.

Accordingly, USG is investing significant amounts of capital to reduce its cost structure, passing these savings onto both its customers and its investors.

More specifically, USG is investing a cumulative $300 million in advanced manufacturing cost saving initiatives between 2017 and 2019 which is expected to generate $100 million of additional EBITDA after completion.

USG is also investing to improve its product offerings. The copmany has managed to reduces its costs by 10% and reduce the weight of tis wallboard by 20% – the two primary concerns of its customers in the construction industry.

USG Corporation 2017 Strategic Priorities

Source: USG Corporation First Quarter Investor Presentation, slide 11

USG does not currently pay a regular quarterly dividend and has not paid one since the first quarter of 2001. Accordingly, investors looking to generate current portfolio income are better served looking elsewhere.

With that said, the company is still quite shareholder-friendly. USG recently announced a $250 million share repurchase program, which amounts to ~6% of the company’s market capitalization at the time of this writing.

USG is also trading at a reasonable valuation.

At the end of fiscal 2016, USG reported full-year adjusted earnings-per-share of $1.70. The company’s current stock price of $28.63 represents a 16.8x multiple of 2016’s earnings (using adjusted earnings).

For context, the average price-to-earnings ratio in the S&P 500 is about 25 right now. USG appears to be attractively valued relative to the rest of the stock market (on average).

Warren Buffett’s interest in USG and the company’s appealing valuation are two reasons why this company merits future research, particularly for investors that do not need current dividend income.

#18 – The Bank of New York Mellon Corporation (BK)

Dividend Yield: 1.6%
Adjusted Price-to-Earnings Ratio: 14.7
Percent of Warren Buffett’s Portfolio: 1.0% 
10 Year Total Return CAGR: 2.8%

Warren Buffett’s investment portfolio holds 33,012,059 shares of the Bank of New York Mellon Corporation (BK) with a total market value of approximately $1.6 billion. It is the smallest holding in Berkshire’s portfolio with a weighting of 1.0% or higher.

Buffett appears to like this stock right now. The Oracle of Omaha increased his stake in this financial services firm by 52% since his previous quarterly 13F filing.

The Bank of New York Mellon Corporation – or BNY Mellon, for short – is a large United States financial services holding company. BNY Mellon was formed in 2007 by the merger of The Bank of New York and the Mellon Corporation.

BNY Mellon is the world’s largest custodian bank with more than $30 trillion of assets in custody. The financial institution is also a prominent investment manager. The first quarter of 2017 saw BNY Mellon report assets under management of $1.6 trillion.

BK BNY Mellon Investment Management Metrics

Source: BNY Mellon First Quarter Earnings Presentation, slide 9

The company also has a robust lending business.

In the first quarter of 2017, BNY Mellon reported net interest revenue of $792 million. The company reported net interest margin – essentially the difference between interest earned and interest incurred –  of 1.14%.

BNY Mellon’s large loan book make it well-positioned to benefit from rising interest rates. This may be one reason why Buffett is bolstering his stake in this bank – rates are likely to rise periodically over the next few years.

BK BNY Mellon Net Interest Revenue

Source: BNY Mellon First Quarter Earnings Presentation, slide 11

The financial crisis of 2007-2009 made many investors wary of financial institutions as an asset class.

Fortunately for investors, large banks are now subject to a high degree of regulations all aimed at reducing investor risk. One of the main metrics that the banks are now assessed on is the Common Equity Tier 1 (or CET1) ratio. It is a measure of the proportion of risk-weighted assets on a bank’s balance sheet.

Higher CET1 ratios denote lower risk banks; conversely, lower CET1 ratios denote higher risk banks. Investors should be pleased to see that BNY Mellon has a CET1 ratio of 11.5% using the standardized approach, which is well in excess of the regulated minimum of 4.5%.

BK BNY Mellon Capital Ratios

Source: BNY Mellon First Quarter Earnings Presentation, slide 13

BNY Mellon is a large, diversified bank holding company with risk metrics well in excess of regulatory minimums. From a risk perspective, the company may appear suitable for investment.

However, the bank’s dividend yield is lower than many of its financial institution peers.

BNY Mellon currently pays a quarterly dividend of $0.19 per share which yields 1.6% on the company’s current stock price of $46.54.

For context, Wells Fargo (WFC) – another Warren Buffett favorite – has a current dividend yield of 2.9%, almost twice the yield of BNY Mellon. For investors focused on dividend yield and looking for exposure to the financials sector, BNY Mellon is likely not the best choice.

With that said, this bank is still attractively valued.

BNY Mellon reported adjusted earnings-per-share of $3.17 for the full year of 2016. The company’s current stock price of $46.54 is trading at a price-to-earnings ratio of 14.7x. For context, the S&P 500’s average price-to-earnings ratio is approximately 25.

Warren Buffett’s interest in BNY Mellon and the bank’s low price-to-earnings ratio make it an intriguing investment opportunity. You can read more Sure Dividend analysis on the Bank of New York Mellon Corporation at the following links:

#17 – General Motors Company (GM)

Dividend Yield: 4.6%
Price-to-Earnings Ratio: 5.3
Percent of Warren Buffett’s Portfolio: 1.1%
10 Year Total Return CAGR: N/A

Berkshire Hathaway’s investment portfolio holds a total of 50,000,000 shares of the General Motors Company (GM) with a total market value of $1.8 billion.

Along with being Buffett’s 17th largest individual stock position, it is also his portfolio’s second highest-yielding stock behind Verizon Communications Inc. (VZ).

General Motors is a well-known United States automotive manufacturer headquartered in Detroit, Michigan. The original General Motors was founded in 1908, but went bankrupt in 2009 during the depths of the financial crisis.

After much restructuring and assistance from the U.S. Treasury, General Motors was re-listed on the New York Stock Exchange in 2010.

Today’s General Motors is a very impressive enterprise. The company generated $166 billion of net revenue in 2016 to go along with $12.5 billion of adjusted EBIT and $9.4 billion of net income.

General Motors’ operational figures are similarly impressive. The company has ~225k employees and runs more than 170 manufacturing facilities which deliver to 19.5k automotive dealerships.

Altogether, General Motors delivered 10.0 million retail automotives and 6.2 mlilion wholesale automotives in 2016.

GM General Motors About GM

Source: General Motors May 2017 Shareholder Engagement Presentation, slide 3

The government’s bailout of General Motors during the financial crisis earned the company the nickname ‘government motors’. Many investors still have a bad taste in their mouth after losing money on this company in the last recession.

However, today’s GM is an independently profitable enterprise.

The company has grown its earnings-per-share by 24% per year (on average) over the last three years. General Motors has also meanginfully increased its free cash flow and has expanded its EBIT margin by 200 basis points during the same time period.

GM General Motors GM Team Delivering Record Results

Source: General Motors May 2017 Shareholder Engagement Presentation, slide 8

General Motors’ strong fundamental performance has translated to phenomenal shareholder returns.

The company’s common stock has meaningfully outperformed its largest competitor Ford (F) and has rewarded long-term investors with a 67.7% cumulative return (for a CAGR of 10.9%) over the past 5 years.

However, General Motors has underperformed its Auto OEM peers over the past 5 years, largely due to the strong performance of disruptive new market participants like Tesla Motors (TSLA).

GM General Motors Market is Recognizing GM's Progress - Strong Relative Total Shareholder Return

Source: General Motors May 2017 Shareholder Engagement Presentation, slide 15

A key component to General Motors’ fundamental growth and stock price performance has been the company’s focus on profitability.

General Motors has an internal target of a Return on Invested Capital (or ROIC) of 20%+. This is very high in a capital-intensive industry such as automotive manufacturing.

This high target for return on invested capital leads General Motors to be very selective in its capital allocation decisions. The company is focusing on its healthy and growing segments and making tough trade-offs to meet this high internal profitability target.

General Motors’ efforts on this front are driving meaningful improvements. The company reported an impressive 28.9% return on invested capital in the most recent fiscal year, and the trend is definitely improving as years go by.

GM General Motors 20% REOIC Adjusted Target Driving Capital Allocation Discipline

Source: General Motors May 2017 Shareholder Engagement Presentation, slide 9

Despite General Motors’ excellent fundamental performance in recent years, the market is failing to price this stock at a reasonable valuation. As we will see later, General Motors is trading at a mid-single-digit price-to-earnings ratio – far too low for a company with positive expected earnings growth.

So why is General Motors trading at such a discount?

There are a few factors.

First (and most importantly), the automotive industry is notoriously cyclical in nature. Consumers tend to cut spending on new automobiles when disposable income becomes constrained, which adversely impacts companies like General Motors and Ford.

Many market participants suspect that General Motors is at the peak of its business cycle, which will limit near-term earnings growth. As such, the company is trading at a lower valuation in anticipation of decreased earnings.

There are other smaller factors, as well. Many fear that General Motors will be severely impacted by the autonomous driving and electric vehicles being introduced by competitors like Tesla (TSLA). There are also lingering fears that automotive manufacturers may again go out of business if another severe recession hits our economy.

While it is true that General Motors may be at the peak of its business cycle, the company has reduced the cyclicality of its business model by significantly lowering the breakeven point of its various automobiles.

General Motors is also isolated from the impact of industry disruptions because it has its own autonomous vehicle division and the Chevrolet Bolt EV (its most popular electric vehicle offering) has been very well-received, earning Motor Trend’s 2017 Car of the Year.

GM General Motors Industry Factors Impacting Valuation, but GM is Well-Positioned

Source: General Motors May 2017 Shareholder Engagement Presentation, slide 14

In the meanwhile, General Motors is taking advantage of its rock-bottom valuation by repurchasing its common stock and reducing its outstanding float.

General Motors expects to return a total of $25 billon to shareholders between 2012 and 2017, of which only $8.6 billion will be dividends.

Looking to the near future, the company expects to repurchase ~10% of its common stock outstanding in fiscal 2017. This very rapid pace of share repurchases will be a considerable boost to future shareholder returns.

GM General Motors Commitment to Return Significant Cash to Shareholders

Source: General Motors Mabe2017 Shareholder Engagement Presentation, slide 11

The company’s shareholder-friendly activity does not stop at the buyback level. General Motors pays a very generous dividend on its common stock.

Quantitatively, General Motors currently pays a quarterly dividend of $0.38 per share, which yields 4.6% on the company’s current stock price of $32.72.

For context, investors can generate more than twice the dividend income from an investment in General Motors than an investment in a broad market index ETF.

Earlier, I mentioned that General Motors has a very low valuation – mid-single-digits, as measured by the price-to-earnings ratio.

The company reported adjusted earnings-per-share of $6.12 for the full-year of 2016. The company’s current stock price of $32.72 is trading at a price-to-earnings ratio of 5.3x 2016’s adjusted earnings-per-share.

To conclude, General Motors has many of the characteristics of a solid dividend investment. The company has a high dividend yield, low price-to-earnings ratio, and even has the seal of approval from Warren Buffett – arguably the greatest investor ever. You can read more Sure Dividend analysis on General Motors Company at the following links:

#16 – United Continental Holdings, Inc. (UAL)

Dividend Yield: N/A (United does not pay a dividend)
Price-to-Earnings Ratio: 9.0
Percent of Warren Buffett’s Portfolio: 1.3%
10 Year Total Return CAGR: 8.9%

Berkshire Hathaway’s common stock portfolio holds 28,951,353 shares of United Continental Holdings, Inc. (UAL) with a total market value of $2.0 billion. United is the smallest airline holding in Warren Buffett’s investment portfolio.

United is the world’s third-largest airline (as measured by revenue) with a market capitalization of $24 billion. United was founded in 1926 and is a member of the Star Alliance, the world’s largest airline alliance.

United is coming off a period of turbulence right now.

The company has experienced severe negative media attention in recent years due to its CEO having a heart attack, an executive federal investigation, and claims from Bloomberg that United is ‘awful’. United was also mentioned in the viral music video “United Breaks Guitars” in 2009 and has seen extensive negative publicity after violently throwing a passenger off an overbooked plane earlier this year.

UAL United Continental Holdings Following A Period of Turbulence

Source: United Presentation at the JP Morgan Aviation, Transportation, and Industrial Conference, slide 2

After seeing all this negative publicity, it may be surprising to see that Warren Buffett has initiated a stake in this airline. After all, the Oracle of Omaha has traditionally placed a great deal of emphasis on integrity and reputation in all walks of life.

Fortunately for Buffett and United’s other investors, the airline is closing on a year of significant transformation. The business saw considerable operational improvements and added 6 new independent members to its board of directors.

UAL United Continental Holdings Came A Year of Transformation in 2016 For United

Source: United Presentation at the JP Morgan Aviation, Transportation, and Industrial Conference, slide 3

While the changes to United’s governance structure are certainly welcome, what might be most impressive is the company’s improvements in various airline-specific operating metrics.

The company has meaningfully improved factors like departure time, arrivial time, and mishandled bag ratios.

These can be seen in detail below.

UAL United Continental Holdings Improving Operational Reliability

Source: United Presentation at the JP Morgan Aviation, Transportation, and Industrial Conference, slide 7

Unlike Warren Buffett’s other airline holdings, United does not pay a dividend. Thus, investors looking to gain exposure to this industry while still generating dividend income might be better off investing in the other airline names in this list.

With that said, United may be appealing to pure-play value investors because of its single-digit price-to-earnings ratio.

United reported adjusted earnings-per-share of $8.65 for fiscal 2016. The company’s current stock price of $77.98 is valuing the company at a price-to-earnings ratio of 9.0x 2016’s adjusted earnings.

As was mentioned with General Motors, a single-digit price-to-earnings ratio is far too low for a company that is expecting positive growth in earnings-per-share. Thus, United merits further research for investors that do not need current dividend income.

#15 – American Airlines Group, Inc. (AAL)

Dividend Yield: 0.9%
Price-to-Earnings Ratio: 5.0
Percent of Warren Buffett’s Portfolio: 1.3%
10 Year Total Return CAGR: 5.6%

Berkshire Hathaway owns 49,278,854 shares of American Airlines Group, Inc. (AAL) with a total market value of $2.1 billion at prevailing stock prices.

American Airlines is the world’s largest airline when measured on a variety of fundamental industry metrics, including revenues, fleet size, and number of destinations served.

The company was founded in 1926 and is headquartered in Fort Worth, Texas. American Airlines has a current market capitalization of $22 billion.

Of the four airline stocks in Berkshire Hathaway’s investment portfolio, American Airlines is experiencing the highest degree of top-line business growth.

American Airlines reported the best revenue numbers during each of the past 3 quarters, and is expected to again lead the pack in the second quarter of 2017.

AAL American Airlines Revenue Trends Are Encouraging

Source: American Airlines Presentation at the 2017 BoA Merrill Lync Transportation Conference

American Airlines’ impressive top-line growth has been helped along by the company’s sizeable investments in international markets.

Specifically, American Airlines is making large investments into the Chinese markets. The company’s investments in the southern region of China is giving American customers access to more than 70 destinations in this important global economy.

AAL American Airlines Product Investment China Southern

Source: American Airlines Presentation at the 2017 BoA Merrill Lync Transportation Conference

American Airlines is also investing heavily in its employees.

2016 saw the company deliver an average 38% pay increase per team member, and the airline has invested in a new HR service center and a new unilateral profit sharing initiative.

Airlines are often criticized because of poor customer experiences. American Airlines investments in its employees will help to mitigate the risk of PR issues stemming from subpar customer service.

AAL American Airlines Investing In Our Team

Source: American Airlines Presentation at the 2017 BoA Merrill Lync Transportation Conference

American Airlines is also exceptionally shareholder-friendly.

The company has strategic priorities for its capital, which includes internal reinvestments into products, operations and automations, the elimination of high-cost debt, and maintaining industry-leading cash balances.

After these capital priorities are satisfied, the airlines returns the remainder of its capital through dividend payments and share repurchases.

The company has repurchased more than $9.5 billion of company stock and paid over $600 million of dividends since 3Q2014. Further, American Airlines has reduced its share count by 34% since its 2013 merger with U.S. Airways.

AAL American Airlines Returning Value to Shareholders

Source: American Airlines Presentation at the 2017 BoA Merrill Lync Transportation Conference

Despite American Airlines’ focus on returning capital to its shareholders, the company does not have a noticeably high dividend yield.

American Airlines currently pays a quarterly dividend of $0.10 per share which yields 0.9% on the company’s current stock price of $45.22. Thus, investors are best looking elsewhere if current dividend yield is a primary focus.

The company’s low dividend yield is more than offset by its rock-bottom valuation.

American Airlines reported adjusted earnings-per-share of $9.10 for fiscal 2016. The company’s current stock price of $45.22 is trading at a price-to-earnings ratio of 5.0. For context, the average price-to-earnings ratio of the S&P 500 index is approximately 25, which means that investors can purchase stock in American Airlines at a 5x discount to the broader stock market.

#14 – The Goldman Sachs Group, Inc. (GS)

Dividend Yield: 1.4%
Adjusted Price-to-Earnings Ratio: 13.2
Percent of Warren Buffett’s Portfolio: 1.6%
10 Year Total Return CAGR: 0.5%

Warren Buffett has purchase 10,959,519 shares of the Goldman Sachs Group, Inc. (GS) for Berkshire Hathaway’s investment portfolio with a current market value of $2.5 billion.

Buffett’s stake in Goldman can be traced back to the 2007-2009 financial crisis when the bank received a $5 billion cash infusion from Berkshire Hathaway in a mad scramble to raise capital.

Today, Goldman Sachs is a United States multinational financial services company that is in the business of investment banking, investment management, securities underwriting, and prime brokerage (among others).

Goldman Sachs was founded in 1869 and has grown to a market capitalization of $85 billion. The company’s current headquarters are in New York City, though it has locations in all of the globe’s major financial centers.

After a tough start to fiscal 2016, Goldman Sachs will benefit from positive momentum heading into 2017. The last two quarters saw the bank’s revenues grow by 19% and 12%, respectively, from the same quarter a year ago.

Further, Goldman Sachs reported a double-digit return on equity in the last two quarters of 2016.

GS Goldman Sachs 2016 Performance Review

Source: Goldman Sachs Presentation at the 2017 Credit Suisse Financial Services Conference, slide 4

The company’s stellar brand and reputation for excellence give it a durable competitive advantage in the competitive world of investment banking. The company currently reports financial results in four core operating segments.

The first is investment banking, where the bank is an undisputed leader. Goldman Sachs is the #1 ranked global advisor for mergers and acquisitions, serving more than 8,000 clients globally across more than 100 countries.

The company also has a booming institutional securities business (which it calls Institutional Client Services) where it has a dominant franchise in both equities and FICC (which stands for fixed income, commodities, and currencies).

Goldman’s two smaller divisions – Investment Management and Investing & Lending – comprise 19% and 13% of the company’s net revenues, respectively.

GS Goldman Sachs Committed to Meeting The Needs Of Our Clients

Source: Goldman Sachs Presentation at the 2017 Credit Suisse Financial Services Conference, slide 3

As a bank that provides sophisticated financial services to a diverse customer base, Goldman Sach’s biggest competitive advantage is its talent base.

As mentioned, the bank has a reputation for excellence, which helps draw talented applicants from both the campus and the workforce.

Fortunately for Goldman, the talent supply continues to be robust. The company saw an 11% increase in applications for summer internships in 2016, and maintains a very small hire rate of ~4%.

The company is also investing heavily in new technology talent, recognizing that the older model of hiring primarily salespeople and financial experts is becoming outdated.

GS Goldman Sachs Our People And Franchise

Source: Goldman Sachs Presentation at the 2017 Credit Suisse Financial Services Conference, slide 13

Unlike other blue-chip financial stocks such as JP Morgan (JPM), this bank has a below-average dividend yield.

Goldman Sachs currently pays a quarterly dividend of $0.75 per share which yields 1.4% on the company’s current stock price of $215.39.

With that said, Goldman is priced attractively right now.

The bank reported earnings-per-share of $16.29 for the full year of 2016. The company’s current stock price of $215.39 is trading at a price-to-earnings ratio of 13.2.

Warren Buffett’s interest in Goldman Sachs and the bank’s low price-to-earnings ratio make it an intriguing stock for investors looking to bolster their exposure to the financials industry.

#13 – Delta Air Lines, Inc. (DAL)

Dividend Yield: 1.7%
Adjusted Price-to-Earnings Ratio: 9.1
Percent of Warren Buffett’s Portfolio: 1.6%
10 Year Total Return CAGR: 10.1%

Berkshire Hathaway’s common stock portfolio contains 55,025,995 shares of Delta Air Lines, Inc. (DAL) with a total market value of $2.5 billion.

Delta is the second-largest airline holding in Warren Buffett’s investment portfolio.

Delta is a major United States airline with a market capitalization of $36 billion. The company was founded in 1929 and has its headquarters in Atlanta, Georgia.

Recent years have seen Delta produce increasingly positive financial numbers. The company has increased its pre-tax profit and capital returns over each of the past two years, while its adjusted net debt and unfunded pension figures have been falling.

DAL Delta Air Lines Consistently Producing Solid Results

Source: Delta Air Lines Presentation at the 2017 JP Morgan Aviation, Transportation, and Industrials Conference, slide 4

Like United, Delta is currently undergoing a period of transition.

The airlines saw compressed margins and essentially flat operating capacity in fiscal 2017. However, the company is expecting operating margins to expand to its target of 17%-19% over the next few years.

DAL Delta Air Lines 2017 Is A Transition Year

Source: Delta Air Lines Presentation at the 2017 JP Morgan Aviation, Transportation, and Industrials Conference, slide 5

In the meanwhile, Delta is committed to maintaining high levels of shareholder returns.

The company has increased both its total dividends and share repurchases each year since 2013. Delta’s share repurchases in particular are very impressive – the airline bought back 18% of its current market capitalization between 2013 and 2016, and has demonstrated a willingness to accelerate these buybacks as its free cash flow grows.

DAL Delta Air Lines Committed To Consistent Shareholder Returns

Source: Delta Air Lines Presentation at the 2017 JP Morgan Aviation, Transportation, and Industrials Conference, slide 12

This stock is a much superior dividend play than the other airlines on this list. Delta currently pays a quarterly dividend of $0.2025 which yields 1.7% on the company’s current stock price of $48.20 – just shy of the S&P 500’s average dividend yield of 1.9%.

The company also trades at a very attractive valuation. Delta reported adjusted diluted earnings-per-share of $5.32 for fiscal 2016. The company’s current stock price of $48.20 is trading at a price-to-earnings ratio of 9.1 using 2016’s adjusted earnings.

Delta’s very low price-to-earnings ratio and reasonable dividend yield make it a great candidate for further research and potential investment.

#12 – Southwest Airlines Co. (LUV)

Dividend Yield: 0.9%
Price-to-Earnings Ratio: 15.5
Percent of Warren Buffett’s Portfolio: 1.6%
10 Year Total Return CAGR: 15.4%

Southwest Airlines is the largest airline holding in Warren Buffett’s investment portfolio – the Oracle of Omaha has accumulated 47,659,456 shares of Southwest for Berkshire’s portfolio with an aggregate market value of $2.6 billion.

Southwest Airlines was founded in 1967 and has grown to a market capitalization of $36 billion. The company is headquartered in Dallas, Texas.

After looking at the company’s impressive operating history, it is not surprising that Southwest is Buffett’s largest airline holding. Most companies in the airline industry have experienced banktrupcy at one point or another – but not Southwest.

LUV Southwest Airlines Unmatched Profitability Record

Source: Southwest Airlines March 2017 Investor Presentation, slide 4

Southwest Airlines’ impressive operating record continues to this day.

The company generated $20.4 billion of operating revenues, $2.4 billion of net income, $4.3 billion of operating cash flow, and $2.3 billion of free cash flow in fiscal 2016. The company also logged a remarkable 30.0% return on invested capital and returned nearly $2 billion of capital to its shareholders through a combination of dividend payments and share repurchases.

LUV Southwest Airlines 2016 - An Outstanding Year!

Source: Southwest Airlines March 2017 Investor Presentation, slide 5

As mentioned above, Southwest Airlines’ 30.0% return on invested is very impressive.

This number has been trending upwards over the past five years, helped by international expansions, fleet modernization, network optimization, and low fuel prices.

Southwest Airlines’ high profitability gives it a strong advantage over its less-profitable peers.

LUV Southwest Airlines Delivering Strong Returns On Investment

Source: Southwest Airlines March 2017 Investor Presentation, slide 7

The company also has a robust balance sheet.

2016 Saw Southwest Airlines finish the year with $3.3 billion of unrestricted core cash and short-term investments.

Further, it has a $1 billion line of credit that is fully undrawn, ready for use if necessary. That is unlikely, as the company has balance sheet leverage (including aircraft leases) of just 32.5%.

LUV Southwest Airlines Sustaining A Strong Financial Position

Source: Southwest Airlines March 2017 Investor Presentation, slide 11

Southwest Airlines also has an investment grade credit rating (BBB- or higher) from each of the three major credit rating agency.

An investment grade credit rating may not seem remarkable – after all, many the stocks covered on Sure Dividend have single-A or higher credit ratings.

However, the airline industry is notoriously cyclical and many companies have subpar balance sheets. Southwest Airlines’ investment grade credit rating is only impressive when you benchmark it against the other companies in its industry (seen below).

LUV Southwest Airlines Industry-Leading Balance Sheet

Source: Southwest Airlines March 2017 Investor Presentation, slide 12

Southwest Airlines is also quite shareholder-friendly.

The airline has grown its free cash flow significantly over the past five years and has used this capital to deliver increasing dividends and share repurchases to its owners.

As seen below, the majority of Southwest Airlines’ capital returns have been in the form of share repurchases.

LUV Southwest Airlines Returning Significant Value Back to Shareholders

Source: Southwest Airlines March 2017 Investor Presentation, slide 15

Southwest Airlines currently pays a quarterly dividend of $0.125 per share which yields 0.9% on the company’s current stock price of $58.04. Southwest Airlines is a low yield dividend stock, but the company is still shareholder-friendly having recently announced a new $2 billion share repurchase program.

Due to its impressive track record, Southwest Airlines sports a premium valuation relative to the other companies on this list.

Southwest reported adjusted earnings-per-share of $3.75 in fiscal 2016. The company’s current stock price of $58.04 is trading at a price-to-earnings ratio of 15.5 using 2016’s adjusted earnings.

For investors focused on value, the other airlines on this list are trading at more attractive valuations. With that said, investors focused on safety might find Southwest Airlines to be the best option thanks to its industry-leading history of profitable operations.

#11 – DaVita Inc. (DVA)

Dividend Yield: N/A (DaVita does not currently pay a dividend)
Price-to-Earnings Ratio: 16.9
Percent of Warren Buffett’s Portfolio: 1.6%
10 Year Total Return CAGR: 9.3%

Warren Buffett’s investment portfolio contains 38,565,570 shares of DaVita Inc. (DVA) with a market value of $2.6 billion.

DaVita is one of the largest kidney care companies in the United States. The company offers various forms of dialysis treatments for its patients, as well as kidney care education programs. DaVita has a market capitalization of $12.6 billion and is headquartered in Denver, Colorado.

As a large player in its industry, DaVita benefits from a scale-based competitive advantage over its smaller and regional peers.

The company currently has more than 2,300 U.S. treatment facilities and treats ~186k patients – or 36% of the national patient base. Amazingly, DaVita has delivered 26.9 million treatments over the last twelve months.

DVA DaVita Kidney Care At A Glance

Source: DaVita Presentation at the 2017 JP Morgan Healthcare Conference, slide 9

The bulk of DaVita’s business comes from its strong base of dialysis treatment centers.

A typical dialysis center serves 80 patients, helped by 17 teammates – nurses, techs, etc. – led by a medical director.

DaVita’s ~2,300 facilities generate, on average, $4 million in annual revenue.

DVA DaVita Typical Dialysis Center

Source: DaVita Presentation at the 2017 JP Morgan Healthcare Conference, slide 10

The company also has a smaller medical practice business called the DaVita Medical Group.

The DMG employs 1,800 clinicians and works alongside 12k affiliate physicians. All said, the DaVita Medical Group operates 205 clinics across 7 states.

DVA DaVita Medical Group

Source: DaVita Presentation at the 2017 JP Morgan Healthcare Conference, slide 22

DaVita generates robust cash flows from its medical practice and dialysis treatment centers.

In fact, the company has generated more than $1 billion of free cash flow in each of the last four fiscal years.

More details about DaVita’s impressive cash flow can be seen below.

DVA DaVita Strong Cash Flows

Source: DaVita Presentation at the 2017 JP Morgan Healthcare Conference, slide 34

DaVita allocates this capital in a very shareholder-friendly manner.

The company does not pay a dividend but instead repurchases stock to lower its share count. DaVita managed to reduce its net share count by 7% between January of 2015 and September of 2016.

DVA DaVita Net Share Count Reduction

Source: DaVita Presentation at the 2017 JP Morgan Healthcare Conference, slide 35

Unfortunately for dividend growth investors, DaVita does not currently pay a dividend (as already mentioned). Thus, the company is outside of the investable universe for most readers of Sure Dividend.

With that said, this healthcare company is trading at a reasonable valuation. DaVita reported adjusted earnings-per-share of $3.83 for fiscal 2017. DaVita’s current per-share market value of $64.57 is trading at a price-to-earnings ratio of 16.9.

DaVita is trading at a discount to the rest of the stock market, but this may not compensate for the lack of dividend payments for most dividend growth investors.

#10 – Moody’s Corporation (MCO)

Dividend Yield: 1.3%
Adjusted Price-to-Earnings Ratio: 23.9
Percent of Warren Buffett’s Portfolio: 1.7%
10 Year Total Return CAGR: 7.0%

The Oracle of Omaha’s investment portfolio holds 24,669,778 shares of Moody’s Corporation (MCO) with a cumulative market value of $2.8 billion.

Moody’s is a United States business and financial services holding company with two primary subsidiaries:

Moody’s was founded in 1909 by John Moody and has grown to a market capitalization of $22.3 billion. The company is headquartered in New York City.

Moody’s business is largely centered around the understanding, measurement, and management of risk. Both of the company’s operating subsidiaries are highly risk-oriented, and are benefitting from the increasing complexity of financial market participants.

MCO Moody's Corporation Moody's Mission Is To Be The World's Most Respected Authority Serving Risk-Sensitive Financial Markets

Source: Moody’s Presentation at the Barclays Americas Select Franchise Conference, slide 4

Of the two operating subsidiaries, Moody’s Investors Service is more important to the overall Moody’s business and contributed 67% of corporate revenue and 84% of corporate operating income.

MCO Moody's Corporation Overview of Moody's Corporation

Source: Moody’s Presentation at the Barclays Americas Select Franchise Conference, slide 6

Moody’s performance in recent years has been very strong.

The company has grown its revenue at a 7% CAGR and its earnings-per-share at a 13% CAGR since 2012. The company also maintains relatively high margins, reporting an adjusted operating margin of 45.5% in fiscal 2016.

MCO Moody's Corporation Financial Performance

Source: Moody’s Presentation at the Barclays Americas Select Franchise Conference, slide 8

Moody’s generates ample cash flow to fund its capital returns.

The company has a much higher free cash flow conversion than its peers and the aggregate S&P 500. For every dollar of revenue generated by Moody’s Corporation, thirty cents of free cash flow materializes.

Moody’s strong free cash flow has helped it to deliver strong dividend growth (19% CAGR since 2012) and significant share repurchases ($500 million expected in 2017), helping the company’s strong total returns.

MCO Moody's Corporation Moody's has a discliplined approach to capital allocation

Source: Moody’s Presentation at the Barclays Americas Select Franchise Conference, slide 11

Moody’s is expecting is strong top-line and bottom-line growth to continue moving forward.

On the top line, the company is expecting mid-to-high single digits growth. This revenue growth combined with margin expansion and share repurchases will lead to high single-digit to low double-digit earnings-per-share growth for Moody’s shareholders.

More details about Moody’s long-term growth opportunities can be seen below.

MCO Moody's Corporation Long-Term Growth Opportunities

Source: Moody’s Presentation at the Barclays Americas Select Franchise Conference, slide 9

Moody’s currently pays a quarterly dividend of $0.38 per share which yields 1.3% on the company’s current stock price of $114.75. The company’s dividend yield is below average. Thus, this stock may not be the best option for income investors.

The company’s valuation is not extremely attractive, either. Moody’s reported full-year adjusted earnings-per-share of $4.81 in fiscal 2016. The company’s current stock price of $114.75 represents a price-to-earnings ratio of 23.9.

Moody’s dividend yield and price-to-earnings ratio do not stand out as an attractive investment. With that said, the company is experiencing strong fundamental growth right now and could still make a rewarding investment.

#9 – Charter Communications, Inc. (CHTR)

Dividend Yield: N/A (Charter Communications does not pay a dividend)
Price-to-Earnings Ratio: 19.8
Percent of Warren Buffett’s Portfolio: 1.9%
10 Year Total Return CAGR: N/A (Charter closed on a significant merger with Time Warner Cable in 2016)

Buffett’s common stock portfolio contains 9,443,491 shares of Charter Communications, Inc. (CHTR) with a total market value of $3.1 billion. Charter is Buffett’s largest holding to have a portfolio weight of less than 2%.

Charter Communications is a United States telecommunications company that was founded in 1993. The company has a market capitalization of $85 billion and is headquartered in Stamford, Connecticut.

Charter Communications has a high number of security types outstanding. To be more specific about Berkshire’s holding, Warren Buffett owns the company Class A common stock which trades on the NASDAQ under the ticker CHTR.

The remainder of Charter Communications’ capital structure can be seen below.

CHTR Charter Communications Capital Structure Summary

Source: Charter Communications First Quarter Investor Presentation, slide 12

Charter Communications is a highly profitable company.

It generated $1.1 billion of free cash flow in its most recent quarter, putting it on pace for $4.4 billion for the fiscal year – equivalent to a free cash flow yield of 5.2% at today’s market prices.

CHTR Charter Communications Free Cash Flow

Source: Charter Communications First Quarter Investor Presentation, slide 11

The company also has significant tax loss carryforwards which limit the cash taxes paid by Charter in years to come. These tax losses are a result of the company’s operating losses related to its 2009 bankruptcy.

Because of these carryforwards, Charter Communications is not expected to be a significant taxpayer until 2019 (at the earliest), with the remaining net operating loss carryforward benefits becoming available through 2024.

CHTR Charter Communications Significant Tax Assets Support Cash Flow Growth

Source: Charter Communications First Quarter Investor Presentation, slide 13

Unlike almost every other stock discussed on Sure Dividend, Charter Communications does not currently pay a dividend. Although Warren Buffett is a fan of Charter Communications, the company’s lack of dividend payments make it unappealing for dividend growth investors.

The company is trading at a reasonable valuation right now. Charter Communications reported diluted earnings-per-share of $15.94 in fiscal 2016. The company’s current stock price of $315.78 represents a 19.8x multiple of 2016’s earnings-per-share.

#8 – U.S. Bancorp (USB)

Dividend Yield: 2.2%
Adjusted Price-to-Earnings Ratio: 15.7
Percent of Warren Buffett’s Portfolio: 2.7%
10 Year Total Return CAGR: 6.6%

Buffett’s Berkshire Hathaway owns 85,063,163 shares of U.S. Bancorp (USB) with a market value of $4.4 billion. U.S. Bancorp is Buffett’s smallest holding with a weight of 2%.

U.S. Bancorp is a financial services holding company with a market capitalization of $87 billion. It is the holding company of the operating subsidiary U.S. Bank. The company was founded in 1968 and is headquartered in Minneapolis, Minnosota.

Buffett is likely a fan of U.S. Bancorp because of the institution’s impressive profitability.

2016 was a record year for the bank – it reported $5.9 billion of net income and $3.24 of earnings-per-share. Further, U.S. Bancorp returend 79% of these earnings through a combination of dividend payments and share repurchases.

USB US Bancorp Key Statistics

Source: US Bancorp Annual Meeting Presentation

The company’s absolute-dollar earnings are impressive, but not nearly as striking as its profitability metrics.

U.S. Bancorp is the United States leader in return on capital employed, return on assets, and efficiency ratios – all key metrics to measure the performance of financial institutions.

The bank’s profitability is compared to its peer group below.

USB US Bancorp 2016 Performance Metrics

Source: US Bancorp Annual Meeting Presentation, slide 32

U.S. Bancorp manages to achieve these impressive returns without taking on undue risk.

The company has an A+ credit rating from S&P, an A1 credit rating from Moody’s and an AA rating from both Fitch and DBRS. This compares favorably to both Wells Fargo and JP Morgan, its larger peers in the banking space.

USB US Bancorp Debt Ratings

Source: US Bancorp Annual Meeting Presentation, slide 33

U.S. Bancorp also stacks up well on a number of non-financial metrics.

The company ranked #3 in a Fortune survery for Management Quality, and #2 in both Value as a Long-Term Investment and Use of Corporate Assets.

Thus, U.S. Bancorp is a high-quality business judging by both its balance sheet and the average perception from market participants.

USB US Bancorp Fortune Key Attributes

Source: US Bancorp Annual Meeting Presentation, slide 35

The bank is also a solid dividend investment.

U.S. Bancorp currently pays a quarterly dividend of $0.28 per share, which yields 2.2% on the company’s current stock price of $51.10. From an income perspective, U.S. Bancorp is a slightly superior investment than an S&P 500 index fund, which has a current dividend yield of 1.9%.

U.S. Bancorp reported earnings-per-share of $3.25 for fiscal 2016. The company’s stock price of $51.1o is priced at a 15.7x multiple of 2016’s earnings-per-share.

U.S. Bancorp trades at a slight premium to many other financial companies. This is likely due to the company’s higher profitability – the markets are showing a willingness to pay for the company’s high-quality earnings mix.

You can read more Sure Dividend analysis on U.S. Bancorp at the following links:

#7 – Phillips 66 (PSX)

Dividend Yield: 3.6%
Price-to-Earnings Ratio: 27.7
Percent of Warren Buffett’s Portfolio: 4.0%
10 Year Total Return CAGR: N/A (became an independent entity in 2012)

Berkshire Hathaway owns 80,689,892 shares of Phillips 66 (PSX) with a market value of $6.4 billion.

Phillips 66 is a diversifed multinational energy company that was spun-off from ConocoPhillips (COP) in 2012. Phillips 66 has a market capitalization of $41.0 billion and is headquartered in Houston, Texas.

Phillips 66 was spun-off from ConocoPhillips with the intent to divest of the company’s midstream and downstream oil operations.

The focus on midstream and downstream assets can be seen in the company’s current operational mix.

PSX Phillips 66 Diversified Downstream Company

Source: Phillips 66 May 2017 Investor Presentation, slide 3

Phillips 66’s midstream network is expansive, ranging all the was from Texas to Washington State. The company owns crude and product pipelines and terminals both directly and through ownership in other public entities.

The company has a part ownership in Phillips 66 Partners (PSXP), a publicly-traded MLP with a market capitalization of $5.5 billion; and DCP Midstream (DCP), a publicly-traded midstream energy MLP with a market capitalization of $5.4 billion.

Phillips 66’s integrated midstream network can be seen in the following diagram.

PSX Phillips 66 Integrated Midstream Network

Source: Phillips 66 May 2017 Investor Presentation, slide 6

Phillips 66 has a reasonable capital structure, which has helped it endure the current low oil price environment.

The company (and its MLP PSXP) has investment grade dredit ratings from the major ratings agencies, and currently has over $7 billion of available liquidity.

PSX Phillips 66 Capital Structure

Source: Phillips 66 May 2017 Investor Presentation, slide 18

Phillips 66 operates with a focus on shareholder returns.

The company’s main focus from a capital allocation perspective is to fund internal growth and maintain its current level of financial strength.

Once those goals are satisfied, Phillips 66 generously rewards its shareholders with both dividend payments and share repurchases.

PSX Phillips 66 Capital Allocation

Source: Phillips 66 May 2017 Investor Presentation, slide 19

Phillips 66 recently increased its quarterly dividend payment to $0.70 per share. This new payout yields 3.6% on the company’s current stock price of $78.25. Phillips 66 high dividend yield makes it an appealing stock for investors seeking to generate income from their investment portfolio.

Phillips 66 reported adjusted earnings-per-share of $2.82 in fiscal 2016. The company’s current stock price of $78.25 represents an adjusted price-to-earnings ratio of 27.7.

A price-to-earnings ratio of 27.7 might seem very high to a mature company like Phillips 66. Unlike some companies, Phillips 66 is not trading at a premium multiple because it is growing fast and investors are paying for future earnings growth; rather, Phillips 66’s earnings are temporarily depressed because of the small crack spread.

When the crack spread expands (and it will, it naturally fluctuates), Phillips 66’s earnings will increase and correspondingly reduce its high price-to-earnings ratio if earnings grow faster than its stock price, which is likely.

You can read more Sure Dividend analysis on Phillips 66 at the following links:

#6 – International Business Machines Corporation (IBM)

Dividend Yield: 3.9%
Adjusted Price-to-Earnings Ratio: 12.2
Percent of Warren Buffett’s Portfolio: 7.0%
10 Year Total Return CAGR: 5.9%

The latest 13F filing indicates Warren Buffett’s common stock portfolio holds 64,561,955 shares of International Business Machines Corporation (IBM) with a market value of $11.2 billion. The filing also indicates that IBM is Buffett’s smallest holding with a portfolio weight above 5%.

Buffett recently trimmed his position in IBM significantly. In fact, the Oracle of Omaha has trimmed his position below the 64,561,955 shares indicated in the latest regulatory filing. Buffett has stated that Berkshire’s actual current ownership is approximately 50 million shares, a ~22% decline from the amount reported in the 13F filing.

All said, Buffett’s recent IBM trades have reduced his IBM position by approximately one-third from its initial size of 81 million shares.

IBM is a multinational technology conglomerate with a market capitalization of $144 billion. The company was founded in 1911 and is currently headquartered in Armonk, New York.

IBM is currently navigating a period of significant change as it divests of legacy businesses and focuses on its ‘Strategic Imperatives’ – business units seen as critical to the company’s future growth.

Progress has been slower than many investors would like. IBM’s stock is down significantly in recent month despite satisfactory financial performance.

IBM International Business Machines Overview

Source: International Business Machines First Quarter Investor Presentation, slide 3

In particular, investors should be pleased with the growth of IBM’s Strategic Imperatives.

42% of IBM’s revenue in the last twelve months was generated by Strategic Imperatives business units, and this segment of IBM’s business is growing at a much faster rate than the rest of the company.

IBM International Business Machines A Cognitive Solutions & Cloud Platform Company

Source: International Business Machines First Quarter Investor Presentation, slide 4

Thus, IBM’s transition is making progress (although more slowly than investors may like).

Looking ahead, the company will continue to benefit from its very solid financial position.

The company reported cash and marketable securities of $10.7 billion at the end of its most recent quarter, up from $8.5 billion in the quarter previous.

IBM’s cash pile is a direct result of its strong free cash flow generation capabilities. The company reported $10.5 billion of free cash flow over the last twelve months, which it spends on capital expenditures ($3.6 billion), acquisitions ($3.2 billion), and a generous capital return program ($9.2 billion).

IBM International Business Machines Cash Flow and Balance Sheet Highlights

Source: International Business Machines First Quarter Investor Presentation, slide 11

IBM is very attractive as a dividend stock.

The company currently pays a quarterly dividend of $1.50 per share which yields 3.9% on its current stock price of $151.98. Investors generate more than twice the dividend income from an investment in IBM than from an investment in the S&P 500 Index (which currently yields 1.9%).

The company’s valuation is similarly appealing.

IBM reported adjusted earnings-per-share of $12.43 in fiscal 2016. The company’s current stock price of $151.98 is trading at a price-to-earnings ratio of 12.2x 2016’s adjusted earnings-per-share. Amazingly, this blue chip technology stock is trading a valuation less than half as expensive as the S&P 500 Index (based on the price-to-earnings ratio).

IBM’s rock-bottom valuation and sky-high dividend yield make it a very attractive investment and certainly worth further research. You can read more Sure Dividend analysis on International Business Machines Corporation at the following links:

#5 – American Express Company (AXP)

Dividend Yield: 1.7%
Price-to-Earnings Ratio: 13.0
Percent of Warren Buffett’s Portfolio: 7.4%
10 Year Total Return CAGR: 3.6%

Berkshire Hathaway owns 151,610,700 shares of the American Express Company (AXP) with a quarter-end market value of ~$12.0 billion.

Buffett’s initial investment in American Express has become an excellent case study in buying distressed companies.

Back in the 1960s, American Express was extending loans to a salad oil company called Allied Crude Vegetable Oil.

Allied Crude found that it could obtain loans from American Express based on its inventory of salad oil barrels.

Knowing that water is denser than salad oil and that salad oil would float on water, company workers filled the barrels mostly full of water to fraudulently bolster their inventory and qualify for larger inventory-secured loans.

Eventually, the Allied Crude scandal was uncovered and American Express suffered losses as one of the company’s creditors. American Express’ stock was punished and Warren Buffett was able to accumulate shares on the cheap.

The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” – Warren Buffett

Fortunately for Buffett, Berkshire, and Berkshire’s investors, the Oracle of Omaha recognized that American Express was far from being ‘on the operating table’. Buffett’s American Express investment is worth far more than its carrying value on Berkshire’s books.

Today, American Express is a multinational financial services company best known for its name-brand American Express credit cards. The company is headquartered in New York City and has a market capitalization of $69 billion.

American Express benefits from having a very diversified business model.

The company has three customer types – Global Commercial, Global Consumer, and Global Network Services – and benefits from significant geographic diversification. Only 66% of the company’s billing are generated within the United States.

AXP Diverse Customers and Geographies

Source: American Express 2017 Investor Day Presentation, slide 18

Much of American Express’ business deals with lending money to consumers and corporations.

Naturally, the company can juice its returns by assuming more risk and lending to less creditworthy counterparties. While this will boost short-term profits (because of higher lending rates), it is a dangerous game to play and will inevitably hurt the company in a recession.

American Express has avoided the pressure to grow by over-extending its loan base. The company has seen satisafactory growth in revolving credit accounts will simultaneously recording a decrease in write-offs.

AXP American Express U.S. Loan Growth and Credit Quality

Source: American Express 2017 Investor Day Presentation, slide 25

The company is also remarkable shareholder-friendly.

It has increased its dividend markedly in the past several years, and a steady pace of share repurchases have meaningfully reduced its share count – increasing the part ownership of each respective shareholder.

These steady buybacks are powerful. Berkshire Hathaway recently applied to the regulators to allow a larger maximum holding in American Express – 24.99%, up from the current cap of 17%.

So, while Buffett is not accumulating additional shares of American Express at this time, the company’s buybacks have materially increased the part ownership of Berkshire Hathaway (along with every other AXP shareholder).

AXP American Express We Have A Track Record of Strong Capital Payout

Source: American Express 2017 Investor Day Presentation, slide 185

Note that in the above diagram, American Express’ payout ratios are very high – 86%, 105%, and 99%.

It is important to recognize that the company’s definition of payout ratio is dividends and per-share dollars spent on share repurchases dividend by earnings-per-share (this definition can be found in the glossary of their investor day presentation).

Thus, American Express’ payout ratio includes both dividends and share repurchases, and the high payout ratio indicated above does not mean the company’s dividend is in danger of being cut.

In fact, American Express’ dividend is the much smaller portion of its capital return program (compared to share repurchases).

The company currently pays a quarterly dividend of $0.32 per share. This quarterly payout yields 1.7% on the company’s stock price of $76.80. American Express’ dividend is very safe, as the company allocated only 22% of its 2016 adjusted earnings-per-share to dividend payments.

The company is also attractively valued.

American Express reported adjusted earnings-per-share of $5.93 for fiscal 2016. The company’s current stock price of $76.80 represents a 13.0x multiple of 2016’s adjusted earnings. Compared to the 25x price-to-earnings ratio of the broader stock market, American Express is presenting investors with plenty of value today.

You can read more Sure Dividend analysis on American Express Company at the following link:

#4 – The Coca-Cola Company (KO)

Dividend Yield: 3.4%
Adjusted Price-to-Earnings Ratio: 23.0
Percent of Warren Buffett’s Portfolio: 10.5%
10 Year Earnings-Per-Share Growth Rate: 6.0%

The Coca-Cola Company (KO) is the first stock on this list to be one of Buffett’s ‘big bets’ – companies with a portfolio weighting of greater than 10%. Berkshire’s current Coca-Cola position represents 10.5% of its current common stock portfolio.

Specifically, Berkshire Hathaway owns 400,000,000 shares of Coca-Cola with a quarter-end market value of $17 billion.

Coca-Cola is a multinational beverage corporation best known for its flagship (and namesake) Coca-Cola soft drink. The company was founded in 1886 and has a market capitalization of $189 billion. Coca-Cola’s current headquarters are in Atlanta, Georgia.

While Coca-Cola is best known for its namesake soda, the company has a very diversified business model. More specifically, Coca-Cola owns 21 brands with $1 billion or more in annual sales.

KO Coca-Cola Our Portfolio Includes 21 Billion-Dollar Brands

Source: Coca-Cola Company Infographic

Despite Coca-Cola’s impressive diversification, many investors wonder if the company’s best days are behind it. There is a widespread consumer belief that the beverage industry is in secular decline.

Fortunately for KO investors, the beverage industry is actually growing. The beverage market grew at 4% per year over the past 2 years, and this rate of growth is expected to continue in the near future.

KO Coca-Cola Industry Growth Remains Solid

Source: Coca-Cola 2017 CAGNY Presentation, slide 9

Coca-Cola is well-positioned to benefit from this industry growth thanks to its dominant market position.

Coca-Cola is also in the process of re-franchising its bottling operations.

Beverage bottling companies are notoriously capital intensive and operationally complex. Coca-Cola is looking to streamline its business model by focusing on its core competencies of manufacturing syrups and concentrates.

The ‘new’ Coca-Cola will have lower revenues, but significantly higher margins. These refranchising efforts are expected to meaningfully boost Coca-Cola’s earnings-per-share.

Progress on Coca-Cola’s refranchising efforts can be seen below.

KO Coca-COla Refranchising Will Drive Local Market Performance

Source: Coca-Cola 2017 CAGNY Presentation, slide 26

Coca-Cola has a dividend track record that is nearly unmatched in the stock market.

The company has increased its annual dividend for an eye-popping 55 consecutive years, and is currently trading at a 3.4% dividend yield (not the 3.6% yield shown in the slide below).

This gives Coca-Cola a unique mix of yield and growth that is very appealing for dividend growth investors.

KO Coca-Cola Strong Record of Returning Cash to Shareowners

Source: Coca-Cola 2017 CAGNY Presentation, slide 38

In fact, Coca-Cola recently increased its quarterly dividend payment to $0.37 per share (up from $0.35 previously).

The new quarterly dividend payment represents a dividend yield of 3.4% based on the current stock price of $43.90. Coca-Cola’s dividend yield is much higher than the S&P 500’s average dividend yield of 1.9%.

Coca-Cola’s valuation is not quite as attractive as its high dividend yield.

Coca-Cola reported adjusted earnings-per-share of $1.91 in fiscal 2016. The company’s current stock price of $43.90 represents a 23.0x multiple of 2016’s adjusted earnings-per-share.

While a price-to-earnings ratio of 23 is not astronomically high for a high-quality business such as Coca-Cola, the company is not a screaming bargain either.

You can read more Sure Dividend analysis on the Coca-Cola Company at the following link:

#3 – Apple Inc. (AAPL)

Dividend Yield: 1.6%
Price-to-Earnings Ratio: 18.4
Percent of Warren Buffett’s Portfolio: 11.5%
10 Year Total Return CAGR: 26.8%

Berkshire Hathaway owns 129,357,106 shares of Apple Inc. (AAPL) with a total market value of $18.9 billion. It is the third largest holding in Warren Buffett’s investment portfolio with a total weight of 11.5%.

Apple is the largest technology company (and largest company) in the United States based its $800 billion+ market capitalization. Apple was founded in 1976 and is headquartered in Cupertino, California.

For most investors, Apple needs no introduction. The company’s flagship product – the iPhone – is used daily by millions of consumers worldwide.

While the iPhone has been a huge component of Apple’s success thus far, it may also contribute to Apple’s potential decline.

This is because Apple is heavily reliant on sales of the iPhone. Case-in-point: Apple’s stock jumped 6% after its first quarter earnings release on the back of higher-than-expected iPhone sales. A 6% movement in a company as large as Apple requires significant buying demand from the markets.

Despite Apple’s incredible business success, the company has a relatively short dividend history compared to many of the other companies covered on Sure Dividend. Apple initiated its dividend in 2012, just five years ago.

With that said, Apple is very likely to become a Dividend Achiever in 2022 – ten years after it re-initated its dividend.

Apple also rewards its shareholders in other ways than traditional dividend payments.

The company is a chronic repurchaser of shares, and recently increased its share repurchase authorization to $210 billion through 2019. All said, Apple’s capital return program calls for $300 billion of cash to be returned to its shareholders.

AAPL Apple Return of Capital and Cash Position

Source: Apple Investor Relations

Apple currently pays a quarterly dividend of $0.63, which yields 1.6% on the company’s current stock price of $152.96. Apple’s current yield is below average, but it likely to increase over time as the company continues to increase its annual dividend payments.

The company is also attractively valued, particular relative to other large-cap technology companies.

Apple reported earnings-per-share of $8.31 in fiscal 2016. The company’s current stock price of $152.96 represents a 18.4x multiple of 2016’s earnings.

You can read more Sure Dividend analysis on Apple Inc. at the following links:

#2 – Wells Fargo & Company (WFC)

Dividend Yield: 2.9%
Price-to-Earnings Ratio: 13.3
Percent of Warren Buffett’s Portfolio: 16.5%
10 Year Total Return CAGR: 6.6%

Warren Buffett’s investment portfolio holds 479,704,270 shares of Wells Fargo & Company (WFC) with a cumulative market value of $26.7 billion. It is the second largest holding in Berkshire Hathaway’s common stock portfolio.

Wells Fargo is the third-largest bank in the world by assets. The company was founded by Henry Wells and William Fargo in 1852 and is headquartered in San Fransisco, California. Wells Fargo has a current market capitalization of $267 billion.

One of the first things that jumps out about Wells Fargo as an investment is its impressive size and scale. The company reported $1.9 trillion of assets on its balance sheet at the time of its last quarterly announcement.

WFC Wells Fargo Balance Sheet Evolution - Assets

Source: Wells Fargo Investor Day Presentation, slide 6

Wells Fargo’s sizeable balance sheet is the result of decades of profitable and growing business. This continues today.

In 2016, the company reported the second-best profitability metrics (Return on Equity and Return on Assets) among its peer group behind U.S. Bancorp, another Warren Buffett favorite.

Wells Fargo is also a highly efficient bank, reporting an efficiency ratio of 59.3% – third among its peers.

WFC Wells Fargo Strong Performance vs. Peers in 2016

Source: Wells Fargo Investor Day Presentation, slide 4

At the fundamental level, Wells Fargo provides investors with an attractive mix of both proftabiltiy and predictabliility.

Wells Fargo has remarkably stable GAAP reported earnings, particularly when compared to other large-cap domestic financial institutions. The company also has a lower ROE standard deviation and its higher-profitability peer in U.S. Bancorp.

WFC Wells Fargo History of Steady Earnings and Low Volatility

Source: Wells Fargo Investor Day Presentation, slide 2

Thus, Wells Fargo is a highly profitable financial institution with a diversified business model.

It’s common stock is similarly attractive, particularly for dividend investors.

Wells Fargo currently pays a quarterly dividend of $0.38 per share, which yields 2.9% on the company’s current stock price of $53.06. Dividend investors generate a full 1% of extra dividend income from an investment in Wells Fargo over the S&P 500 index.

The bank is also trading at a very reasonable valuation.

Wells Fargo reported earnings-per-share of $3.99 in fiscal 2016. The company’s current stock price of $53.06 is trading at a price-to-earnings ratio of 13.3. For context, the S&P 500 is currently trading at ~25 times earnings.

Wells Fargo’s high dividend yield and low price-to-earnings ratio make it an intringuing investment opportunity. You can read more Sure Dividend analysis on Wells Fargo & Company at the following link:

#1 – The Kraft Heinz Company (KHC)

Dividend Yield: 2.7%
Price-to-Earnings Ratio: 27.1
Percent of Warren Buffett’s Portfolio: 18.3%
10 Year Total Return CAGR: N/A (Kraft Heinz was formed in 2015)

Berkshire Hathaway owns 325,634,818 shares of the Kraft Heinz Company (KHC) with a quarter-end market value of $29.6 billion. Kraft Heinz is the single largest holding in Warren Buffett’s investment portfolio with a weight of 18.3%.

Kraft Heinz is the fifth-largest food & beverage company in the world. The company was formed on July 2, 2015 thanks to the merger between Kraft Foods Group and H.J. Heinz Holding Corporation.

Before the merger, Heinz was privately owned by Berkshire Hathaway and 3G Capital. Kraft (KRFT) was publicly-traded, and Kraft shareholders received one share of KHC along with $16.50 in cash for every share of KRFT they owned prior to the transaction.

This merger brought many of the world’s most famous food brands together under the same corporate roof.

Aside from the flagship Kraft and Heinz names, Kraft Heinz owns iconic brands like ABC, Capri Sun, Classico, Hell-O, Kool-Aid, Lunchables, and many others. Altogether, Kraft owns 200+ brands sold in nearly 200 countries, and 8 brands with $1 billion+ in annual sales.

More details about Kraft Heinz’s brand portfolio can be seen below.

KHC Kraft Heinz Beloved Global Brands

Source: Kraft Heinz Fact Sheet

The pro-forma Kraft Heinz entity benefits from remarkable size and scale. 2016 saw the company generate $26.5 billion in net sales, helped by its previously-mentioned 8 brands with $1 billion+ in annual sales. Kraft Heinz’s operational footprint is similarly impressive – more than 40 countries hold dedicated Kraft Heinz employees.

2016 saw the company generate $26.5 billion in net sales, helped by its previously-mentioned 8 brands with $1 billion+ in annual sales. Kraft Heinz’s operational footprint is similarly impressive – more than 40 countries hold dedicated Kraft Heinz employees.

KHC Kraft Heinz Company Statistics

Source: Kraft Heinz Fact Sheet

As the first full year after Kraft Heinz’s defining merger, 2016 was a very important year for this company.

Key priorities for the company included executing on cost synergy initiatives and reducing its leverage (which was high following the acquisition). The company also wanted to maintain its strong dividend payout.

As shown in the following slide, Kraft Heinz’s 2016 was successful as measured by these metrics.

KHC Kraft Heinz 2016 Review

Source: Kraft Heinz Fourth Quarter Investor Presentation, slide 2

2017 is off to a similarly strong start for Kraft Heinz. On May 3, Kraft Heinz reported financial results for the first quarter of 2017.

Although the company faced troubling sales trends (net sales decreased by 2.7% organically and 2.4% on a constant-currency basis over the same period a year ago), Kraft Heinz was able to generate robust bottom-line growth.

The company reported a 15.1% increased in adjusted earnings-per-share over the same period a year ago, helped by preferred share refinancing.

More details about the first quarter of Kraft Heinz’s fiscal 2017 can be seen below.

KHC Kraft Heinz Q1 Financial Summary

Source: Kraft Heinz First Quarter Investor Presentation, slide 3

Kraft Heinz currently pays a quarterly dividend of $0.60 per share, which yields 2.7% on the company’s stock price of $90.28. For context, the average dividend yield in the S&P 500 is ~1.9%, which means that investors can generate approximately 40% more income from an investment in Kraft Heinz than from purchasing a broad market ETF.

Kraft Heinz reported adjusted earnings-per-share of $3.33 in fiscal 2016. The company’s current stock price of $90,28 represents a 27.1x multiple of 2016’s earnings (using adjusted earnings).

Kraft Heinz appears slightly overvalued on this metric (even though the business is growing quickly), and investors looking for a more attractively priced food stock may want to consider alternatives such as Hormel Foods (HRL).

You can read more Sure Dividend analysis on the Kraft Heinz Company at the following link:

Final Thoughts

Having databases of high-quality stocks – such as the stocks held in Warren Buffett’s investment portfolio – is a very powerful tool for the self-directed investor.

So how can we find other groups of high-caliber businesses?

Well, as this article notes, the portfolio of large, institutional investment managers are phenomenal places to look for quality dividend stocks.

To that end, Sure Dividend has created the following stock databases:

Another fantastic way to identify high-quality stocks is to look for stocks with long histories of steadily increasing their dividend payments. This indicates two things:

  1. The business is doing well (earnings are increasing to support rising dividend payments)
  2. Management is shareholder-friendly

The following databases contain stocks with long histories of increasing dividends:

Alternatively, retirees may want to consider stocks with high yields or stocks that pay monthly dividends. With that in mind, Sure Dividend has created the following useful stock databases:



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