Warren Buffett is one of the world’s most successful investors. A mere $100 investment made in 1973 in the investment holding company that Buffett leads, Berkshire Hathaway (BRK.A) (BRK.B), would be worth a staggering $427,000 today.
Investing directly in Berkshire Hathaway is a strategy that has paid off over the decades. But while direct ownership in Berkshire Hathaway is the simplest way to invest like Buffett, you don’t necessarily have to buy the stock to do so. Investors can pick and choose how they want to mirror Buffett’s investing strategy and what they want to adapt to their investing objectives and risk tolerance.
Here are two individual stocks featured in Berkshire Hathaway’s $366 billion investment portfolio that could be appealing buys for dividend growth investors this month.
1. Mondelez International: Brands known and loved by consumers
Berkshire Hathaway loves consumer staples with powerful brands. Brands that people trust and buy regularly often produce revenue and earnings growth for shareholders of said consumer staples.
Berkshire Hathaway’s stake in its fourth-biggest holding, Coca-Cola, is worth just shy of $24 billion and comprises approximately 6.5% of its stock portfolio. Berkshire Hathaway’s $40 million stake in Mondelez International (MDLZ) seems quite small by comparison. But like Coca-Cola in beverages, Mondelez is a well-established leader in snacks. Thanks to brands including Oreo cookies, Ritz crackers, and Cadbury chocolate, Mondelez holds the top global market share in the cookies and crackers category and the No. 2 spot in chocolate.
Thanks to this industry dominance and pricing power, analysts expect the company’s earnings will rise by 9.3% annually over the next five years. Coupled with a 2.4% dividend yield that is substantially higher than the S&P 500 index’s 1.5% yield, this could translate into double-digit annual total returns for shareholders in the years ahead. Better yet, Mondelez’s dividend payout ratio is positioned to register at around 49% in 2023. That should leave plenty of room for the company to deliver generous dividend hikes moving forward.
Best of all, Mondelez’s forward price-to-earnings (P/E) ratio of 19.8 represents a slight discount versus the confectioner industry average forward P/E ratio of 20.4. The stock is a wonderful business trading at a below-average valuation. That is probably why analysts have an average 12-month share price target of $83 — 20% upside from the current $70 share price.
2. Visa: The world’s leading publicly traded fintech company
Under Buffett’s direction, Berkshire Hathaway also likes to invest in great businesses in industries with lengthy growth runways. The global payments industry boasts especially promising growth prospects: Consulting firm Boston Consulting Group predicts the industry will experience 8% annual revenue growth for the foreseeable future. This will help the industry reach a mind-boggling $3.3 trillion in annual revenue by 2031.
As the largest credit and debit card payment processor on the planet outside of the Chinese state-owned UnionPay, this bodes well for Visa (V): Berkshire Hathaway owns a $2.1 billion stake in the company. As the company’s cards in circulation and the payment volumes handled by its network grow, favor and acceptance among the world’s merchants will as well. For the sake of driving growth in their customer bases, more businesses will accept Visa’s payment methods over time.
Analysts think the company’s earnings will compound by 14.6% annually over the next five years. Visa’s 0.7% dividend yield doesn’t seem impressive at first glance. But with the dividend payout ratio poised to come in at less than 21% for the fiscal year ending this month, healthy dividend growth should compensate for lower starting income.
Visa’s forward P/E ratio of 25.2 is well above the credit services industry peer average of 18.2. Given the company’s industry leadership and remarkable growth profile, this isn’t an unreasonable valuation, however. Thus, analysts have an average 12-month share price target of $278 for the stock, implying 12% capital appreciation from the current $248 share price.
— Kody Kester
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Source: The Motley Fool