Warren Buffett’s Equity Investment Portfolio Part 2: Consumer Staples



Warren Buffett likes these relatively boring dividend paying companies

Did you know that legendary investor Warren Buffett is also a big fan of dividend-paying stocks? While we don’t often hear him talk about dividends, here’s a fact: Buffett’s top 10 stocks in terms of market value were companies paying dividends as of June 30.

That’s why, if you’re looking to earn income from stocks, Buffett may be one of the best investors to learn. And since his company Berkshire Hathaway Inc. (NYSE: BRK.B) is required by the United States Securities and Exchange Commission (SEC) to disclose its holdings on a quarterly basis, it is very easy for us to see what the “Oracle of Omaha” is up to.

This is the second installment in a series entitled To graft on the portfolio of Warren Buffett, in which I discuss some of the legendary investor’s recent themes and moves, with a focus on income generation. The first part of the series focused on bank stocks. This time, I’m going to talk about something that is very appropriate for the current market environment: consumer products.

If you’ve been following the news, you will probably have noticed that there is a lot of uncertainty in the markets right now. An unexpected headline on trade talks or geopolitical tensions could cause U.S. stocks to swing sharply.

This is why, for several months, investors seem to be moving away from the riskiest and most volatile sectors. If you are a risk averse income investor, you will also want to find a safe haven.

This is where consumer staples companies come in. Simply put, everyday consumer goods are essential commodities in our lives. People buy these products regardless of their financial situation. Common examples of basic consumer products are food, beverages, and household products.

Because people are unwilling to cut these products out of their budgets even when the going gets tough, the companies that make these products are essentially running recession-proof businesses. Meanwhile, some consumer staples companies are well established and have the capacity to pay dividends on a regular basis. Therefore, if you want to earn recession-proof dividends, the consumer staples segment deserves serious consideration.

Coca-Cola Co

Speaking of Consumer Staples and Warren Buffett, one company immediately comes to mind: Coca-Cola Co (NYSE: KO).

It’s no secret that Buffett has a particular fondness for Coca Cola products. The billionaire investor once said that he consumes about 700 calories from Coke per day and is “about a quarter of Coke.” (Source: “Buffett defends Berkshire’s big stake in Coke, CNBC, May 2, 2016.)

Therefore, Buffet’s taste for Coca Cola stocks should come as no surprise. The Oracle of Omaha started buying KO stocks in the late 1980s. And as you can see from the chart below, Buffett’s investment in the beverage company has produced astronomical returns.

Coca-Cola Co Quotes Chart (NYSE: KO)

Graphic courtesy of Stockcharts.com

As you would expect, the value of Buffett’s investment in Coca-Cola stocks has grown significantly over the decades.

According to Berkshire Hathaway Inc.’s latest 13-F filing with the SEC, Buffett’s company held 400 million KO shares as of June 30. The market value of those shares at the time of the report was $ 21.7 billion, making Coca-Cola Co the third largest holding in Warren Buffett’s portfolio. (Source: “Information table for form 13F, United States Securities and Exchange Commission, last accessed September 20, 2019.)

Note that Coca-Cola has been around for over 100 years and has gained a strong presence in the beverage market. The company offers more than 500 brands and sells its products in more than 200 countries and territories. Many of its brands, such as “Coca-Cola”, “Dasani”, “Minute Maid” and “Sprite” are household names. (Source: “Investor overview, Coca-Cola Co, last accessed September 20, 2019.)

With such a well established business, the business is well positioned to pay recurring dividends. Coca-Cola Co has been a favorite choice for income investors for decades. This is because the company pays not only a stable dividend, but a growing dividend.

Consider this: Coca-Cola Co has increased its cash dividend every year for 57 consecutive years. This record makes him a “Dividend King”, a title awarded to companies that have recorded at least 50 consecutive years of annual dividend increases. Of the thousands of companies listed on the US stock exchanges, only 27 currently hold Dividend King. (Source: “The Coca-Cola Company Board of Directors Announces 57th Consecutive Annual Dividend Increase”, Coca-Cola Co, February 21, 2019.)

Trading at $ 53.91 per share, the KO share offers an annual dividend yield of three percent.

Remember, because most consumers can afford a can of Coke even during an economic downturn, Coca-Cola Co is a classic example of a recession-proof business. For investors looking to collect recession-proof dividends, this Warren Buffett stock might be worth considering.

Kraft Heinz Co

Another consumer staples giant of which Buffett owns many shares is Kraft Heinz Co (NASDAQ: KHC). Again, this shouldn’t come as a surprise. The billionaire investor once said he ate like a six-year-old. (Source: “Warren Buffett’s Secret to Staying Young: “I eat like a six-year-old.Fortune, February 25, 2015.)

More seriously, Berkshire Hathaway supported the merger between Kraft Foods and Heinz. The merger created the current Kraft Heinz Co, which has a portfolio of popular food brands such as “Kraft”, “Heinz”, “Philadelphia”, “Jell-O” and “Kool-Aid”.

While this business seems fairly sustainable (consumers tend to keep buying Heinz Ketchup and Kraft Macaroni even when times are tough), the dividend history for KHC stock is less than stellar.

In particular, in February, the board of directors of Kraft Heinz announced a quarterly cash dividend of $ 0.40 per share, which is a reduction of 36% from the company’s previous quarterly payment of nearly 0 , $ 63 per share. (Source: “The Kraft Heinz Company declares regular quarterly dividend of $ 0.40 per share”, Kraft Heinz Co, February 21, 2019.)

Management said the dividend cut would improve Kraft Heinz’s balance sheet, support business investment and raise the level of payout to a point that “can grow over time and allow for additional disposals.”

No one likes dividend cuts. Since that announcement (Kraft Heinz reported earnings the same day), KHC stock has plunged more than 40%, a massive drop for a blue chip company with $ 34.3 billion in market capitalization.

Kraft Heinz Co stock chart

Graphic courtesy of Stockcharts.com

Due to the inverse relationship between a company’s dividend yield and the stock price, the fall in KHC stock means that it can still offer an oversized return despite a falling dividend.

At the time of this writing, Kraft Heinz Co has an annual dividend yield of 5.7%. To put this in perspective, the average dividend yield of all companies in the S&P 500 is currently below 1.9%. (Source: “S&P 500 dividend yield, Multpl.com, last accessed September 20, 2019.)

In other words, this low-dividend stock offers a return almost three times the benchmark average.

At the end of June, Berkshire held 325.6 million Kraft Heinz shares. The stake is worth approximately $ 9.2 billion at current market prices. (Source: United States Securities and Exchange Commission, op. Cit.)

Procter & Gamble Co

Procter & Gamble Co (NYSE: PG) is bigger than Coca-Cola and Kraft Heinz combined in terms of market capitalization. But compared to the other two companies, P&G represents a much smaller stake in Warren Buffett’s portfolio. As of June 30, Berkshire held 315,400 shares of Procter & Gamble Co, with a market value of approximately $ 38.3 million. (Source: United States Securities and Exchange Commission, op. Cit.)

Yet P&G is one of my favorite consumer staples dividend games. I presented the PG stock in my Lifetime income board in November 2016. Assuming an automatic reinvestment of dividends, Procter & Gamble stock has produced a total return of 61.4% since then.

Procter & Gamble Co stock chart

Graphic courtesy of Stockcharts.com

The reason I liked Procter & Gamble Co in 2016, and why I still love it, is the company’s ability to return an increasing amount of money back to investors. Just like Coca-Cola, Procter & Gamble is one of 27 stocks with the title Dividend King.

P&G has paid uninterrupted dividends since its incorporation in 1890 and has increased its payouts in each of the past 63 years. (Source: “History of splits and dividends, Procter & Gamble Co, last accessed September 20, 2019.)

Trading at $ 122.24 per share, the PG share offers an annual dividend yield of 2.4%.

The best part is that although it has been around for over a century, the business of the company continues to grow.

In P & G’s fourth quarter of fiscal 2019, which ended June 30, the company generated $ 17.1 billion in net sales, representing a 4% increase year-over-year . Organic sales, which exclude the impact of foreign currencies, acquisitions and divestitures, increased seven percent year-on-year. (Source: “P&G Reports Fourth Quarter and Full Year 2019 Results”, Procter & Gamble Co, July 30, 2019.)

The final figure was even more impressive. Excluding special items, Procter & Gamble’s basic earnings were $ 1.10 per share in the fiscal fourth quarter, a 17% improvement over last year. On a currency neutral basis, basic earnings per share (EPS) for the PG share increased 26% year-on-year.

Note that Procter & Gamble’s core EPS easily hedged its $ 0.75 per share cash dividend declared and paid during the quarter.

The company is not done with its growth story. For fiscal 2020, management expects all-inclusive sales growth of three to four percent. At the same time, Procter & Gamble’s core EPS is expected to improve by four to nine percent from its FY2019 figure.

Remember, Procter & Gamble makes products that are always on people’s shopping lists. Its trademarks include “Tide”, “Bounty”, “Oral-B”, “Downy” and “Gillette”. As one of the most established consumer staples companies in the world, P&G is well positioned to continue to reward income investors.

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