Warren Buffett’s Top 20 Stocks

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 sharewhich 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 reportedadjusted 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 sharewhich 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.

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Carl Schwartz 4 years ago Member's comment

I always use #Buffet as a guide when investing.

Sonya Wiley 4 years ago Member's comment

Dear Warren

Love You

Sonya

Barry Hochhauser 4 years ago Member's comment

I think everyone loves #WarrenBuffet! :-)