A Warren Buffett vote of confidence in a particular stock doesn’t mean you should jump on the bandwagon, but the Berkshire Hathaway CEO’s long-term track record speaks for itself. The man knows how to find a bargain.
Below is a screen of stocks inspired by Buffett’s two new picks that feature attractive dividend yields that are expected to be well covered by free cash flow.
The news of Buffett’s new investment positions may send stocks soaring as the ears of other investors perk up. This happened after Berkshire Hathaway Inc. BRK.B,
disclosed at the end of February 16 that it had purchased shares of Verizon Communications Inc. VZ,
and Chevron Corp. CVX,
– two stocks with attractive dividend yields, one of which is economically priced compared to the weighted valuation of the S&P 500 SPX index,
Shares of Verizon were up 3% in early trading on February 17, while Chevron’s shares were up 3.5%. With dividends reinvested, Verizon was down 7% for 2021 through February 16, after a flat performance in 2020. Chevron was up 1.5% at the beginning of February 17 and was already up 12% for 2021 after a 26% drop in 2020. on the upside as investors look to life after the pandemic. Crude oil West Texas Intermediate CL00,
it had risen 68% from the end of October 31 to February 16, when it closed 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’s shares trade at a forward price-to-earnings ratio of 10.7, compared to a weighted aggregate forward P / E of 22.5 for the S&P 500. The shares have a 4.64% dividend yield.
One way to measure a company’s ability to cover its dividend (and hopefully increase it) is to look at its free cash flow, which is the cash flow remaining after planned capital expenditures. This is money that can be used for any corporate purpose, including expansion, share buybacks, or increased dividends. We can measure a company’s free cash flow performance by dividing the estimated or final free cash flow by the current share price. Due to disruptions to the US economy in 2020, all free cash flow returns that follow make use of consensus estimates for the next reported 12 months.
Verizion’s forward free cash flow yield is 8.97%, showing a “top margin” of 4.34% over the current dividend.
Chevron’s stock is trading at a forward P / E ratio of 24.8, which is higher than that of the S&P 500. On the other hand, 2021 is expected to be a recovery year for oil and natural gas, and Analysts’ earnings estimates may not have been brought up to date. with the increase in fuel prices. Chevron’s dividend yield is 5.54% and its forward free cash flow yield is 7.99%, leaving a margin of maneuver of 2.45%.
None of this is to say that Buffett is overly obsessed with stocks with high dividend yields. It is not. Among the publicly traded holdings the company disclosed on February 16, there are many companies that do not 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 Verizon and Chevron picks and excluding stocks that Berkshire Hathaway does not yet own, here are the 22 stocks among the S&P 500 with dividend yields of at least 4.00%, for which estimates are available. free cash flow for calendar 2021, with headroom indicated. The list is ordered by dividend yield.
Scroll through the table to see all the data, including future P / E ratios and total returns for 2021 and 2020.
For real estate investment trusts, the industry standard for measuring the ability to pay dividends is working capital funds, a non-GAAP figure that adds depreciation and amortization to earnings and subtracts earnings from income. property sale. Therefore, future estimates of FFO are used in the “Estimated FCF return” column of the table.
The list excludes four stocks Berkshire Hathaway already owns: Verizon, Chevron, and two more:
AbbVie Inc. ABBV,
has a dividend yield of 4.99%, with a forward free cash flow yield of 10.54% for a top margin of 5.55%.
Kraft Heinz Co. KHC,
it has a dividend yield of 4.52% and a forward free cash flow yield of 7.59% for a top margin of 3.06%. The company cut its dividend by more than a third in February 2019.
A high dividend yield could indicate that investors are bitter about the company’s business prospects or its ability to sustain the dividend long-term, despite a high FEL yield. For example, the top-performing stock on the list is Lumen Technologies Inc. LUMN,
which was CenturyLink before changing its name in September. The dividend yield is 8.48%. CenturyLink cut its quarterly dividend by 26% the same day it authorized a $ 2 billion share buyback plan in February 2013. The company’s quarterly dividend remained at 54 cents a share until it was reduced to $ 2 billion. current 25 cents a share as of February 2019. years through February 16, Lumen / CenturyLink shares were down 34%, with dividends reinvested, while they were down 38% over 10 years.
Other companies on the list that have cut dividends in the last 10 years include Williams Cos. WMB,
Kinder Morgan Inc. KMI,
Vornado Realty Trust VNO,
and Simon Property Group Inc. SPG,
which reduced his payment by 38% in June.
All of this emphasizes the importance of doing your own research to form your own opinion of a company’s long-term prospects if you see stocks of interest here.
Other than CenturyLink, the stocks listed above with the lowest anticipated P / E valuation are AT&T Inc. T,
with a dividend yield of 7.18% and P / E of 9.2, followed by Pfizer Inc. PFE,
with a yield of 4.50% and an advanced P / E of 10.3.