A vote of confidence by Warren Buffett in a particular action doesn’t mean you have to jump, but the long-term trajectory of Berkshire Hathaway CEO speaks for itself. The man knows how to detect a bargain.
Below is a stock screen inspired by Buffett’s two new options that feature attractive dividend yields that are expected to be well covered by free cash flow.
New investment positions in the Buffett word can lead to higher stocks as the ears of other investors rise. This happened after Berkshire Hathaway Inc. BRK.B,
revealed in late 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 has a cheap price compared to the weighted valuation of the S&P 500 SPX index,
Shares of Verizon rose 3% in early February 17 operations, while Chevron rose 3.5%. With dividends reinvested, Verizon had fallen 7% by 2021 through Feb. 16, after flat performance in 2020. Chevron rose 1.5 percent in early Feb. 17 and had already risen 12 percent. for 2021 after a 26% decline in 2020. on the rise, as investors expect life after the pandemic. West Texas CL00 Intermediate Crude Oil,
it had risen 68% from the close on Oct. 31 to Feb. 16, when the barrel was set at $ 60.05.
All of the following is based on February 16 closing prices and consensus estimates among analysts surveyed by FactSet over the next 12 months.
Verizon shares are trading at a 10.7% price-to-earnings ratio, compared to a 22.5 weighted aggregate P / E for the S&P 500. The shares have a dividend yield of 4.64%. .
One way to measure the company’s ability to cover the dividend (and hopefully increase it) is to look at its free cash flow, which is its remaining cash flow after projected capital expenditures. This is money that can be used for any corporate purpose, including expanding, repurchasing shares, or raising dividends. We can measure the free cash flow performance of a company by dividing the final or estimated cash flow by the current stock price. Due to the interruptions in the U.S. economy in 2020, all of the following free cash flow yields make use of consensual estimates for the next 12 months.
Verizion’s term free cash flow is 8.97%, with a margin of 4.34% over the current dividend.
Chevron shares are trading at an advanced P / E ratio of 24.8, which is higher than the S&P 500. Again, 2021 is expected to be a year of oil and natural gas recovery and it is possible that analysts ’earnings estimates have not come with rising fuel prices. Chevron’s dividend yield is 5.54% and the term free cash flow yield is 7.99%, leaving a “free margin” of 2.45%.
None of this means Buffett is overly fixed on stocks with high dividend yields. It is not. Among the stock exchanges the company unveiled on Feb. 16 are many 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 screen
Working from Buffett’s Verizon and Chevron selections and excluding shares that Berkshire Hathaway does not yet hold, here are the 22 S&P 500 shares with dividend yields of at least 4.00%, for which they are available free cash flow estimates for the 2021 calendar, with margin indicated. The list is sorted by dividend yield.
Scroll through the table to see all the data, including P / E ratios and total returns for 2021 and 2020.
For real estate investment trusts, the industry standard for measuring dividend payability is funds from operations, a figure that does not correspond to GAAP that adds depreciation and amortization to earnings and subtracts the profits from the sale of properties. Thus, FFO estimates are used in the “estimated FCF yield” column of the table.
The list excludes four shares that Berkshire Hathaway already had: Verizon, Chevron and two more:
-
AbbVie Inc. ABBV,
+ 2.21%
has a dividend yield of 4.99%, with a term free cash flow yield of 10.54% for the margin of 5.55%. -
Kraft Heinz Co. KHC,
+ 3.08%
it has a dividend yield of 4.52% and a term free cash flow yield of 7.59% for the margin 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 acidic in the company’s business prospects or in its ability to maintain the dividend in the long run, despite a high FCF return. For example, the highest value in the list is Lumen Technologies Inc. LUMN,
which was CenturyLink before changing its name 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 fell to 25 cents a share in February 2019. For five Between February 16 and February 16, Lumen / CenturyLink shares fell 34%, reinvesting dividends, while they fell 38% during ten years.
Other companies on the list that have reduced dividends in the last ten years are Williams Cos. WMB,
Kinder Morgan Inc. KMI,
Vornado Realty Trust VNO,
and Simon Property Group Inc. SPG,
which reduced its payment by 38% in June.
All of this emphasizes the importance of doing your own research to form your own opinion about a company’s long-term prospects if you see any stock of interest here.
Aside from CenturyLink, the stocks listed above with the lowest term P / E valuation are 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.