Warren Buffett might like dividends more than you think he does. Take a look at Berkshire Hathaway’s (BRK.A) (BRK.B) portfolio: Roughly two-thirds of the stocks in it pay dividends.
Some of these dividend stocks — such as Chevron and Johnson & Johnson — have been favorites of income investors for decades. Others are known more for their growth prospects than their dividends. I’d put Apple and Activision Blizzard squarely in the latter group.
But what is Buffett’s most underrated dividend stock? Here’s my nominee.
Delivering the goods
Berkshire Hathaway doesn’t own a huge stake in United Parcel Service (UPS). Buffett first bought the stock in the fourth quarter of 2006. He sold a big chunk of Berkshire Hathaway’s shares in UPS in 2012, leading to some speculation that he would soon completely exit the position. That didn’t happen, though. The conglomerate still owns 59,400 shares — the same amount it held at the end of 2012.
UPS, of course, is one of the world’s leading package delivery companies. It’s been in business since 1907, and now operates in more than 220 countries and territories. Last year, it delivered 6.2 billion packages.
Since Berkshire Hathaway first initiated a position in UPS, the stock has delivered a total return in the ballpark of 300%. That’s not bad, but it’s less than the total returns generated by the S&P 500 during the same period.
However, it’s a different story over the last five years. UPS has trounced the S&P 500. It has also delivered much higher total returns than Berkshire Hathaway itself.
Underrated dividend stock?
This outperformance is one reason why I think that UPS is Buffett’s most underrated dividend stock. But I also suspect that many investors haven’t given enough attention to the company’s dividend program.
Let’s start with UPS’ attractive dividend yield of more than 3.6%. That’s not quite enough to rank it among Buffett’s top five dividend stocks. However, UPS isn’t far from making the cut.
More important, in my view, though, is UPS’ track record of dividend growth. The company has increased its payouts for 14 consecutive years. During the last three years alone, management has boosted the dividend by 60%.
I fully expect that UPS will be able to continue growing its dividend steadily for a long time to come. Its dividend payout ratio is only 46%, indicating plenty of financial flexibility to cover more hikes.
Dividends aren’t the only way UPS rewards its shareholders. It bought back $3.5 billion of its shares in 2022. And its board of directors has authorized a new $5 billion share repurchase program.
Opportunities ahead
UPS also has several key growth opportunities ahead. Healthcare especially stands out. CEO Carol Tomé said on the company’s fourth-quarter conference call that its healthcare business generated $9.2 billion in revenue last year and should make more than $10 billion in 2023. She stated that UPS’ goal is “to become the No. 1 complex healthcare logistics provider in the world.”
The company also has great prospects in expanding its revenue from small to medium-sized businesses (SMBs). Tomé noted that SMBs provided 28% of UPS’ U.S. volume in 2022, up from 26.8% in the prior year. UPS has increased its SMB penetration for 10 consecutive quarters.
Sure, UPS’ volume of shipments for its largest customer, Amazon, is decreasing as a result of a previous contractual agreement. However, UPS CFO Brian Newman said on the Q4 call that the company feels good about its ability to manage this decline.
Buffett owns other stocks that could be bigger winners over the long run. He also owns other stocks with higher dividend yields at their current share prices. But income investors shouldn’t overlook UPS. It just might be Buffett’s most underrated dividend stock.
— Keith Speights
Source: The Motley Fool