A vote of confidence by Warren Buffett in a particular stock doesn’t mean you should jump on the bandwagon, but the long history of Berkshire Hathaway CEO speaks for itself. The man knows how to see a bargain.
Below is a screen of stocks inspired by Buffett’s two new harvests featuring an attractive, expected product that will be well covered by free cash flow.
Word of Buffett’s new investment positions can raise shares as the ears of other investors go up. This happened after Berkshire Hathaway Inc. BRK.B,
announced at the end of Feb. 16 that it was on shares of Verizon Communications Inc. Buy VZ,
and Chevron Corp. CVX,
– two stocks with an attractive yield, one at a cheap price compared to the S&P 500 SPX Index Valuation,
Shares of Verizon rose 3% in early trading on Feb. 17, while Chevron was up 3.5%. With reinvested shares, Verizon had declined 7% for 2021 through February 16, following a flat performance in 2020. Chevron rose 1.5% in early February 17 and had already risen 12% for 2021 after a 26% decline in 2020. Oil is on the rise as investors look forward to life after the pandemic. CL00 intermediate crude oil West Texas,
has risen 68% from its close on Oct. 31 through Feb. 16, when it settled at $ 60.05 a barrel.
All of the following are based on February 16 closing prices and consensus estimates among analysts surveyed by FactSet for the next 12 months.
Verizon stock trades at a forward price-to-earnings ratio of 10.7, compared to a combined total P / E of 22.5 for the S&P 500. The shares have a 4.64% share yield.
One way to measure a company’s ability to cover its share (and hopefully build) is to look at its free cash flow, which is the cash flow left over after spending planned capital. This is money that can be used for any physical purpose, including expanding, repurchasing shares or raising shares. We can measure a company’s free cash flow yield by dividing a slice or estimate free cash flow by the current quota price. As a result of the impact on the U.S. economy in 2020, the following free cash flow results will use consensus estimates for the next 12 months reported.
Verizion’s free cash flow yield is 8.97%, showing a “headroom” of 4.34% over the normal share.
Chevron stock trades at a forward P / E ratio of 24.8, which is higher than the S&P 500. Then again, 2021 is expected to be a recovery year for oil and natural gas, and analysts ’employment estimates may not have skyrocketed with rising fuel product prices. Chevron’s share yield is 5.54% and its free cash flow yield is 7.99%, leaving a “headroom” of 2.45%.
None of this is to say that Buffett is too stock-based with a large stock yield. It is not. Among the public trading holdings announced by the company Feb. 16, there are many companies that do not pay any benefits, including Amazon.com Inc. AMZN,
Biogen Inc. BIIB,
Communication Charter Inc. CHTR,
and General Motors Co. GM,
which suspended its quarterly division in April.
Buffett split stock screen
Operating from the Buffett elections of Verizon and Chevron and excluding stocks that Berkshire Hathaway does not already exist, these are the 22 stocks among the S&P 500 with a share yield of at least 4.00%, and free cash flow estimates for 2021 calendar available, with marked head room. The list is sorted by quota yield.
Scroll the table to see all the data, including forward P / E ratios and total output for 2021 and 2020.
For property investment trusts, the industry standard for measuring the ability to pay shares is cash from activity, a non-GAAP figure that puts depreciation and depreciation back into employment and deducts profits from the sale of property. FFO estimates are therefore used in the “FCF output estimate” column of the table.
The list does not exclude four stocks that Berkshire Hathaway already has – Verizon, Chevron and two others:
-
AbbVie Inc. ABBV,
+ 2.23%
has a quota yield of 4.99%, with a free cash flow yield of 10.54% for a principal of 5.55%. -
Kraft Heinz Co. KHC,
+ 3.07%
has a quota yield of 4.52% and a free cash flow yield of 7.59% for a headroom of 3.06%. The company cut its share by more than a third in February 2019.
Continental yields could indicate that investors are bitter about the company’s business prospects or its ability to sustain the sector in the long run, despite FCF’s high yield. For example, the highest yielding stock on the list is Lumen Technologies Inc. LUMN,
which CenturyLink was before was renamed in September. The yield of the allotment is 8.48%. CenturyLink cut its quarterly share by 26% on the same day it authorized a $ 2 billion stock repurchase plan in February 2013. The company’s quarterly share remained 54 cents until it was cut to the usual 25 cents in February 2019. For five years through February 16, shares of Lumen / CenturyLink went down 34%, with reinvested shares, down 38% for 10 years.
Other companies on the list that have cut shares over the past 10 years include Williams Cos. WMB,
Kinder Morgan Inc. KMI,
Vornado Realty VNO Trust,
and Simon Property Group Inc. SPG,
which reduced pay by 38% in June.
All of this reinforces the importance of doing your own research to form your own opinion about what your company’s long-term prospects are if you see any interesting stock here.
In addition to CenturyLink, the stock listed above with the lowest forward P / E valuation is AT&T Inc. T,
with a share yield of 7.18% and a P / E of 9.2, followed by Pfizer Inc. PFE,
with a yield of 4.50% and onwards P / E of 10.3.