A vote of confidence by Warren Buffett in a particular stock doesn’t mean you have to jump on the cart, but the Berkshire Hathaway CEO’s long-standing track record speaks for itself. The man knows how to view a bargain.
Below is a screen showing stocks inspired by Buffett’s two new picks with attractive dividend yields expected to be well covered by free cash flow.
The news of Buffett’s new investment positions may send stocks higher as other investors’ ears brighten. This happened after Berkshire Hathaway Inc. BRK.B,
announced at the end of February 16 that it would hold shares in Verizon Communications Inc. VZ had bought,
and Chevron Corp. CVX,
– two stocks with attractive dividend yields, one of which is cheaply priced compared to the weighted valuation of the S&P 500 Index SPX,
Shares of Verizon were up 3% in early trading on Feb. 17, while Chevron was up 3.5%. With dividends reinvested, Verizon was down 7% for 2021 through Feb. 16, after a flat performance in 2020. Chevron was up 1.5% early Feb. 17 and was already up 12% before 2021 after a 26% decline in 2020. about the rebound as investors look ahead to life after the pandemic. West Texas Intermediate crude oil CL00,
was up 68% from the close of October 31 to February 16, when it was set at $ 60.05 a barrel.
All of the following is based on the February 16 closing prices and consensus estimates among analysts polled by FactSet for the next 12 months.
Verizon’s stock trades at a forward price-to-earnings ratio of 10.7, compared to a weighted total future P / E of 22.5 for the S&P 500. The stock has a 4.64% dividend yield.
One way to gauge a company’s ability to cover (and hopefully increase) its dividend is to look at free cash flow, the cash flow remaining after planned capital expenditures. This is money that can be used for any corporate purpose, including expansion, share buybacks, or dividend increases. We can measure the return on a company’s free cash flow by dividing the underlying or estimated free cash flow by the current stock price. Due to the distortions of the U.S. economy in 2020, all the free cash flow returns that follow use consensus estimates for the next 12 months reported.
Verizion’s future free cash flow yield is 8.97%, a headroom of 4.34% from the current dividend.
Chevron shares are trading at a forward P / E ratio of 24.8, which is higher than the S&P 500. On the other hand, 2021 is expected to be a year of recovery for oil and natural gas, and analysts’ earnings expectations have possibly not caught up. with rising fuel commodity prices. Chevron’s dividend yield is 5.54% and its forward free cash flow return is 7.99%, leaving a headroom of 2.45%.
This is not to say that Buffett is overly fixated on stocks with a high dividend yield. He is not. Among the publicly traded holdings the company announced on Feb. 16, there are plenty of companies that don’t pay dividends, including Amazon.com Inc. AMZN,
Biogen Inc. BIIB,
Charter Communications Inc. CHTR,
and General Motors Co. GM,
which suspended its quarterly dividend in April.
A Buffett dividend stock screen
Working from Buffett’s selection of Verizon and Chevron and excluding stocks that Berkshire Hathaway does not have yet, here are the 22 shares of the S&P 500 with dividend yields of at least 4.00%, for which free cash flow estimates for calendar 2021 are available, with headroom indicated. The list is sorted by dividend yield.
Scroll through the table to see all the data, including the projected price / earnings ratios and total returns for 2021 and 2020.
For real estate mutual funds, the industry standard for measuring dividend payout equity is funding from operations, a non-GAAP figure that adds impairment and amortization back to earnings and subtracts gains on the sale of real estate. Thus forward FFO estimates are used in the “estimated FCF yield” column in the table.
The list doesn’t include four stocks already owned by Berkshire Hathaway – Verizon, Chevron, and two more:
-
AbbVie Inc. ABBV,
+ 2.04%
has a dividend yield of 4.99%, with a future free cash flow yield of 10.54% for a headroom of 5.55%. -
Kraft Heinz Co. KHC,
+ 2.79%
has a dividend yield of 4.52% and a future free cash flow yield of 7.59% for a headroom of 3.06%. The company cut its dividend by more than a third in February 2019.
A high dividend yield may indicate that investors are sour about the company’s business outlook or its ability to hold the dividend over the long term, despite a high FCF return. For example, the highest-yielding stock on the list is Lumen Technologies Inc. LUMN,
that was CenturyLink before it was renamed in September. The dividend yield is 8.48%. CenturyLink cut its quarterly dividend by 26% on the same day it approved a $ 2 billion share buyback plan in February 2013. The company’s quarterly dividend remained 54 cents a share until it was lowered to its current 25 cents a share in February 2019. For five years through February 16, shares of Lumen / CenturyLink were down 34%, with dividends reinvested, while they were down 38% for 10 years.
Other companies on the list that have cut dividends in the past 10 years include Williams Cos. WMB,
Kinder Morgan Inc. RMI,
Vornado Realty Trust VNO,
and Simon Property Group Inc. SPG,
which reduced his payout by 38% in June.
All of this emphasizes the importance of your own research to form your own opinion on a company’s long-term outlook if you see interesting stocks here.
Aside from CenturyLink, the stock listed above with the lowest term P / E rating is AT&T Inc. T,
with a dividend yield of 7.18% and a P / E of 9.2, followed by Pfizer Inc. PFE,
with a yield of 4.50% and a forward P / E of 10.3.