A Closer Look at Four Warren Buffett Sells

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Along with Warren Buffett’s new buys of Deere & Company, Wabco Holdings and Precision Castparts, it was worth noticing that Berkshire Hathaway (NYSE: BRK-B) sold some of its holdings. The corporation sold out its shares of CVS Caremark (NYSE: CVS) and Dollar General (NYSE: DG). In addition, it reduced some of its stakes in two long-term holdings, Johnson & Johnson (NYSE: JNJ) by 95% and Procter and Gamble (NYSE: PG) by 11%. It seems that his two talented investment managers, Todd Combs and Ted Weschler, made those decisions. Industry-wise, more industrial stocks are added and consumer and retailer stocks were sold out or reduced. Should investors follow? Let’s go through each stock to find out.

CVS Caremark

The elimination of CVS seems to have created bearish momentum for its shares. It was just a one-year holding for Berkshire Hathaway. Buffett bought CVS in Q3 at the average price of $35.73. He has begun to sell CVS since last quarter when the average price was $44.87, and the total stake in CVS was eliminated for an average price of $46.20. He picked the right time to enter CVS. Right after he bought it, CVS soared. For the trailing twelve months, CVS delivered a 8% return on invested capital, with 3.18% net margin and 1.76x financial leverage. CVS is now trading at $44.70 per share; the total market cap is $55.73 billion. The market is valuing CVS at 15.3x P/E and 1.5x P/B. It is paying its shareholders a dividend yield of 1.4%.

Dollar General

Warren Buffett added discount retailer Dollar General to Berkshire Hathaway’s portfolio in the middle of last year. As of June 2011, Berkshire Hathaway owned around 1.5 million shares in the company. Buffett began to buy Dollar General at an average price of $32.81, and he added more positions in the following quarter at a slightly higher price. It was reported that Berkshire Hathaway sold out its position in the company completely in the price range of $48.54 - $55.58.

The dollar store concept has been performing quite well during the recession, with the high unemployment rate and low wage growth bringing more customers to the discount stores. Over the past 10 years, Dollar General has managed to grow its revenue continuously, from $6.1 billion in 2002 to $14.8 billion in 2011.  For the trailing twelve months, its return on invested capital was 12%, net margin was 5.7%, and financial leverage was 2.1x. Dollar General is trading at $47.96 per share with a total market capitalization is $16 billion. The market is valuing the company at 18.3x P/E and 3.3x P/B.

Johnson & Johnson

Warren Buffett bought JNJ in 2002 and 2005 when the stock price was trading at 15.2x P/E. He has been buying and selling JNJ stocks for the last several years. In the last quarter, he reduced Berkshire Hathaway’s stake in JNJ significantly, down more than 95%, at an average price of $68.34. After the trade, Berkshire Hathaway currently owns only 492,028 shares.

In the last 10 years, JNJ has kept delivered a double-digit return on invested capital. However, the return has been trending down. For the trailing twelve months, its ROIC was 10.6%. JNJ has a history of paying increasing dividends over time. Its annual dividend was $0.80 per share in 2002, and it increased to $2.25 per share in 2011. Nevertheless, its payout ratio has increased, from 36.8% in 2002 to as high as 64.5% in 2011. JNJ is trading at $69.07 per share, with the total market capitalization of $191.41 billion. The market is valuing the company at 22.7x P/E and 3x P/B, with a dividend yield of 3.4%.

Procter & Gamble (P&G)

Warren Buffett ended up owning P&G because he had previously owned Gillette since 1989. Berkshire Hathaway was Gillette’s largest shareholder, with around 9% ownership of the company. In 2005, P&G bought Gillette for $57 billion, giving Buffett a whopping $4.4 billion in profit. After the deal, Berkshire owned 100 million shares in P&G. As of Q1 2012, ownership was reduced to 75 million shares, and as of Q3, it was just more than 52.7 million shares. Compared to other positions, P&G takes a good chunk of total Berkshire Hathaway’s US investment portfolio, at nearly 4.9%.

P&G is receiving a lot of attention these days due to Bill Ackman, the activist investor who owns around 1% of the company. His fund, Pershing Square, bought P&G for $62 per share, at 16x P/E. He said that the valuation is historically low on depressed earnings. He was trying to put pressure on the current chairman and CEO, Robert McDonald, to perform better and deliver better return for shareholders. Trailing twelve months, P&G’s ROIC was nearly 10.95%. It is trading at $66.32 per share, with the total market capitalization of $181.33 billion. The market is valuing P&G at 21.6x P/E and 2.9x P/B. The current dividend yield is 3.3%.

My Foolish Take

Investors should look deeper in the business fundamentals to determine the course of actions suitable for themselves. Personally, I think over the long-run, the great businesses with long operating histories such as JNJ and P&G will deliver decent returns for its shareholders.  


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway and Johnson & Johnson. Motley Fool newsletter services recommend Berkshire Hathaway, Johnson & Johnson, and The Procter & Gamble Company. 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!

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