High Growth Dividend Stocks from Berkshire Hathaway’s Portfolio
Aubrey is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In these times of economic uncertainty, the extra buffer that dividend income provides is helpful. I have taken a closer look at what fund managers have in their portfolio in search of safe, growing dividends and found some of gems in the portfolio of Berkshire Hathaway. My criteria are dividend growth, low payout ratio, positive outlook, profitability and relative price.
IBM: Is the growing, high dividend return safe?
IBM (NYSE: IBM) is a dividend income seeker’s haven. It was able to increase its payment by 15% on the average in the last couple of years. For one that is already paying $3.30 per share on an annual basis, this is huge. Its payout ratio based on cash flow is only 19%, which means that it has a lot left for reinvestment and can sustain the growth it has shown in the past. An important gauge used to determine whether the dividend is safe or not is if the business is likely to grow. Based on analysts’ estimate, IBM's EPS will possibly grow by 9.7% each year in the next five years. Also, the company is able to turn 16% of its revenues into profit, a margin higher than its rival Accenture’s 11.29%. Its operating margin of over 21% also outperforms its peers, based on data compiled by Macroaxis.
In terms of pricing, IBM is undervalued relative to the industry with its P/E ratio of 13.44 as opposed to the industry's 20.8. Its beta of 0.73 is also lower than those of its peers. Accenture has a beta of 1.36 while Wipro has 1.47. IBM stock as an asset therefore offers less volatility relative to the market compared to its competitors. This means stably high dividend returns to quench your thirst for dividend income.
Walmart: business growth and low risk of volatility
In 2012, Walmart (NYSE: WMT) has paid $1.59 for each share of stock. In the past couple of years, the company has managed to increase its dividend by 14% each year. Its total dividend has amounted to only about 21% of its net operating cash flow in 2012 and therefore a significant portion is left for reinvestment, which enables the company to sustain its dividend growth in the future. The EPS is expected to grow by 9.29% each year in the next five years.
Walmart has experienced deceleration in the quarter ending April 30 when its quarterly revenue inched up only by 1.04% from a year ago. However, the net operating cash flow and free cash flow both increased by 5% and 28%, respectively. Also, its profit margin is stable, at 3.31% in the latest quarter, the same as the same quarter in 2012.
In terms of pricing, Walmart has a P/E ratio of 14.83, just about in line with Macy’s 14.53 but lower than T.J. Maxx’s 18.87. It is also priced at a lower valuation than the industry in general, which has a P/E ratio of 17.30. Moreover, Walmart stock is less volatile than its peers. It has a low beta of 0.31 -- opposed to Macy’s 0.66 and T.J. Maxx’s 0.55.
Watch your dividend income double within a year with Wells Fargo!
Dividend income seekers should find Wells Fargo (NYSE: WFC) very rewarding: its annualized dividend has swelled by 112% on average in the past two years. The latest quarterly dividend payout at $0.30 per share is already 36% above that for the same period in the previous year. It has shown its ability to sustain this immense growth given a payout ratio of only 25.5% in 2012.
However, its free cash flow has been negative in the past two years. Despite this, Wells Fargo enjoys positive outlook. EPS is estimated to grow by 7.28% annually in the next five years. The quarterly forecasts at Nasdaq are steady and are getting more upward than downward revisions. Moreover, it turns roughly 40% of its revenues into profits, which offsets the recent contraction in its quarterly revenue.
Wells Fargo’s beta is 1.14, which indicates that it is less volatile than its rivals JP Morgan (1.8), Citibank (2.09), and Bank of America (1.91). It has a P/E ratio of 11.6, higher than JP Morgan’s 9.42 but lower than Citibank’s 17.84 and Bank of America’s 40.81. Meanwhile, the debt-equity ratio is slowly but continuously sliding down; reflective of its ability to service its debts.
US Bancorp: strong dividend growth, improving debt-equity ratio and profitability
US Bancorp (NYSE: USB) is another top dividend stock. The dividend payment has swelled by over 100% annually during the previous two years. Even at this rate, the dividend payout based on cash flow is only 19.47%. The company enjoys a favorable outlook for the next five years with EPS expected to grow at 9.16% each year. This is no surprise since the company has an impressive profit margin (TTM) of 42.8%. In fact, the quarterly profit margin is increasing; the 2013 first quarter’s 29.64% is higher than the same period last year, with 27.46%, and significantly above that for 2011's 23.43%.
The company’s debt ratio, as of the end of the first quarter, is 1.32. While some consider this high, the ratio has been declining. The latest ratio of 1.32 is way below that of the same period last year, at 1.61, and a year before that, at 2.05. Additionally, the company is less volatile than its peers by beta. Its beta of 0.95 is lower than Fifth Third Bancorp’s 1.43, and Comerica’s 1.41. Meanwhile, US Bancorp has higher operating margins and profit margins compared to the two and a P/E ratio that is comparable -- 12.07 as opposed to 10.67 for Fifth and 14.26 for Comerica. Its PEG ratio, a metric for valuation with growth accounted, of 1.26 is lower than its rivals' which means that room for appreciation relative to its growth performance is relatively larger. US Bancorp also beats these competitors in the dividend field.
Hence, despite the recent fall in its quarterly revenue, the metrics show that financially, the company is progressing. It outperforms its rivals in terms of pricing, profitability and dividend growth and return while offering a less volatile performance. If you are aiming for a growing dividend income, consider this company.
The top dividend stocks in Berkshire Hathaway's portfolio have shown impressive dividend growth with relatively low payout ratios. This means that they have significant funds left for reinvestment, which is essential for continued growth. To ensure the safety of a dividend, one needs to look at efficiency, positive outlook, sound financial stance and ability to shine among peers. I believe these stocks are worth the position they have in the portfolio of Berkshire Hathaway.
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Aubrey Tabuga has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of International Business Machines. and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!