Berkshire Hathaway's Top 3 Holdings: Are They Worth Investing In?
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Warren Buffett's Berkshire Hathaway has a totally market capitalization of $284 billion. It focuses on a long-term investing perspective, including publicly traded stocks. Berkshire's portfolio is diversified across a wide variety of sectors. Its top three holdings, as per its recent 13F filing with the SEC, were Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC), and International Business Machines (NYSE: IBM).
In this article, I have analyzed these three companies on the basis of their expansion plans, as well as their performance in the long-term horizon.
Stevia, a new sweetener
In the first quarter of 2013, Coca-Cola observed slower growth in sales volume of carbonated drinks in Europe by 5%. Due to growing health concerns and obesity, customers prefer low-calorie drinks. In order to overcome this issue, the company has added stevia, a sugar-free sweetener, to soft drinks. Stevia is 25-30 times sweeter than table sugar and has zero calories. In 2012, the European Food Safety Authority declared stevia a safe sweetener.
Coca-Cola has come out with Sprite Zero, which has 30% less calories while the taste remains the same. At present the company is using stevia as a sweetener in 25 worldwide products. It is sure that stevia will gain its customers' confidence and will bring a significant change in 2013 and 2014 financial results. Europe's total sales are expected to grow from $1.17 billion to $1.22 billion by the first quarter of 2014.
Coca-Cola also announced that it will restart its bottling business in Myanmar after 60 years, on June 4, 2013. In 1962, investments made by U.S. companies were banned in Myanmar, when domestic penalties were imposed on them against a government council of military leaders. Coca-Cola is the first company to get an investment permit in Myanmar after the end of military rule in the country. The company has plans to invest $200 million for next five years. This investment will boost the total production, sales, and distribution. Coca-Cola announced that it has set a target to reach 100,000 retail stores in Myanmar within the next six months.
x86 server divestiture
IBM, on June 4, 2013, announced that it will acquire SoftLayer Technologies, a major cloud computing company of the U.S, for $2 billion. This will help IBM solidify its position in the cloud computing market. IBM has set a benchmark in the cloud computing business, which grew 70% year over year, and the company posted total revenue of $23.4 billion in the first quarter of 2013. With such pace, it is estimated that by 2015, its cloud computing business will reach up to $7 billion.
IBM is in talks with Lenovo to sell IBM's System x x86 server. The reported price of this deal falls between $5 billion and $6 billion. Lenovo recently announced a bond issue, which indicates a strong determination to acquire IBM’s low-end server business. IBM decided to sell the x86 server division, as there was a decrease in demand from its clients. Execution of this deal will increase fourth quarter revenue. The cash generated from this deal will be utilized to invest in its high-revenue-generating segments like cloud computing. With the help of this deal, the total revenue is expected to increase from $23.04 billion to $29.61 billion by the fourth quarter of 2013.
Commission and fees contribute in revenue generation
Wells Fargo is the third-largest retail brokerage firm in the U.S. Its retail brokerage client assets have increased to $1.3 trillion, up by 7% year over year in the first quarter of 2013. Commission and fees related to its brokerage and asset-management business reported $7.7 billion in revenue in the first quarter of 2013. This includes fees generated from its portfolio-management service, transactions executed on client direction, investment-banking activities, advisory, and underwriting services.
With the rising demand of brokerage and advisory services, Berkshire Hathaway and 3G Capital have hired Wells Fargo in the first quarter as their financial advisor to acquire Heinz. It is estimated that revenue generated from commissions and fees will increase from $7.7 billion in the first quarter of 2013 to $11 billion in first quarter of 2014.
Wells Fargo reported free cash flow, or FCF, of $14.81 billion in the year 2012. Now it is planning to utilize FCF to pay higher dividends in June 2013. The company has regularly paid dividends since 2000, maintaining an average yield of 2.91% every quarter. The company will maintain dividend yield of 2.90% for the next quarters, too. It declared a dividend of $0.30 per share for the second quarter of 2013, 20% higher as compared to $0.25 per share in February 2013.
By adding stevia to carbonated drinks, Coca-Cola is sure that more customers will be attracted and that this will lead to an increase in sales volume of carbonated drinks. The new bottling business will start generating revenue by the end of 2013.
By acquiring SoftLayer Technologies, IBM will be able to expand its cloud computing business. And by selling its x86 server to Lenovo, it will be able to focus more on revenue-generating segments. This will help IBM generate high revenue by the end of 2013.
Wells Fargo will make huge profit from its growing advising and from financing big companies. The company is paying dividends on a continuous basis to provide good returns to its investors.
I recommend buying all three stocks.
Coca-Cola's wide moat has helped provide its shareholders with superior gains in the past, but the company faces some new threats to its continued market dominance. The Motley Fool recently compiled a premium research report containing everything you need to know about Coca-Cola. If you own or are considering owning shares in the company, you’ll want to click here now and get started!
Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and 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!