A vote of confidence by Warren Buffett in a certain action does not mean that you should jump on the bandwagon, but the long-term record of CEO Berkshire Hathaway speaks for itself. The man knows how to find a business.
Below is a stock screen inspired by Buffett’s two new choices, which show attractive dividend yields that are expected to be well covered by the free cash flow.
The words of Buffett’s new investment positions may send bigger shares as the ears of other investors rise. This happened after Berkshire Hathaway Inc. BRK.B,
revealed at the end of February 16 that it had bought shares of Verizon Communications Inc. VZ,
and Chevron Corp. CLC,
– two shares with attractive dividend yields, one of which is cheaply compared to the weighted valuation of the S&P 500 SPX Index,
Verizon shares rose 3% in early trading on February 17, while Chevron rose 3.5%. With reinvested dividends, Verizon fell 7% for 2021 through Feb. 16, after a poor performance in 2020. Chevron rose 1.5 percent in early February 17 and has already risen 12 percent for 2021, after a decrease of 26% in 2020. increasing, as investors look forward to life after the pandemic. West Texas Intermediate Oil CL00,
rose 68 percent from Oct. 31 to Feb. 16, when it stood at $ 60.05 a barrel.
All of the following are based on the February 16 closing prices and the consensus estimates of analysts surveyed by FactSet for the next 12 months.
Verizon shares are trading at a 10.7 forward price-to-earnings ratio, compared to a weighted aggregate P / E of 22.5 for the S&P 500. The shares have a dividend yield of 4.64%.
One way to assess a company’s ability to cover its dividend (and hopefully increase it) is to analyze the free cash flow, which is the cash flow remaining after the planned capital expenditures. This is money that can be used for any corporate purpose, including expanding, repurchasing shares or increasing dividends. We can measure the return on a company’s free cash flow by dividing the final or estimated cash flow by the current share price. Due to the disruptions of the US economy in 2020, all free cash flow returns that follow make use of consensual estimates for the next 12 months reported.
Verizion’s free cash flow yield is 8.97%, showing a “head margin” of 4.34% over the current dividend.
Chevron shares are trading at a P / E ratio of 24.8, which is higher than the S&P 500. Then again, 2021 is expected to be a year of recovery for oil and gas, and analysts ’earnings estimates it may not have recovered with rising fuel prices. The return on Chevron dividends is 5.54%, and the return on forward cash flow is 7.99%, leaving a “maximum margin” of 2.45%.
None of this means that Buffett is overly fixed on high-yield dividend stocks. He is not. Among the publicly traded stakes the company unveiled on Feb. 16 are a lot of non-dividend-paying companies, 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 screen
Working from the Verizon and Chevron selections at Buffett and excluding shares that Berkshire Hathaway does not already own, here are the 22 shares of the S&P 500 with dividend yields of at least 4.00%, for which cash flow estimates are available free for the calendar 2021, with the space for the head indicated. The list is sorted by dividend yield.
Scroll the table to see all data, including forward P / E ratios and total returns for 2021 and 2020.
For real estate investment trusts, the industry standard for measuring dividend payment capacity is operating funds, a non-GAAP figure that adds depreciation and amortization back to earnings and decreases earnings from the sale of the property. So the forward FFO estimates are used in the “estimated FCF yield” column of the table.
The list excludes four shares already held by Berkshire Hathaway – Verizon, Chevron and two more:
-
AbbVie Inc. ABBV,
+ 2.02%
has a dividend yield of 4.99%, with a free forward cash flow yield of 10.54% for a margin of 5.55%. -
Kraft Heinz Co. KHC,
+ 2.70%
has a dividend yield of 4.52% and a term free cash flow yield of 7.59% for the maximum margin of 3.06%. The company reduced its dividend by more than a third in February 2019.
A high dividend yield could indicate that investors are sour about the company’s business prospects or its ability to maintain the dividend in the long run, despite a high FCF return. For example, the highest-yielding stock on the list is Lumen Technologies Inc. LUMN,
which was CenturyLink before being renamed in September. The dividend yield is 8.48%. CenturyLink reduced its quarterly dividend by 26% on the same day it authorized a $ 2 billion share repurchase plan in February 2013. The company’s quarterly dividend remained at 54 cents a share until it was reduced to 25 cents per share in February 2019. For five years to February 16, Lumen / CenturyLink shares fell 34%, dividends being reinvested, while they fell 38% for 10 years.
Other companies on the list that have reduced dividends over the past 10 years include Williams Cos. WMB,
Kinder Morgan Inc. KMI,
Vornado Realty Trust VNO,
and Simon Property Group Inc. SPG,
which reduced its pay by 38% in June.
All of this underscores the importance of doing your own research to form your own opinion about a company’s long-term prospects, if you look at stocks of interest here.
In addition to CenturyLink, the stock listed above with the lowest P / E forward rating is 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 a direct P / E of 10.3.