Berkshire Hathaway(BRK.A) - Get Report(BRK.B) - Get Report CEO Warren Buffett is one of the greatest investors of all time. His investing skills have grown his net worth to $66.9 billion, making him the third-richest person in the world, according to Forbes.
You can do more than learn from Buffett's quotes (although that's a great idea to improve your investing skills). It seems like knowing what one of the greatest investors of all time is investing in is cheating, but we can do just that.
Examining Berkshire Hathaway's portfolio shows that Buffett is by and large a dividend investor. The top four holdings all pay dividend yields of 2.7% or more and make up about 60% of the portfolio. You can see Buffett's 20 highest-yielding stocks here.
Aside from the theme of investing in established, dividend-paying businesses, another theme emerges when analyzing Buffett's investing record: He has an affinity for consumer-goods stocks, and past investments have included Gillette, Wrigley and Duracell. It's easy to understand why Buffett favors established consumer companies. These businesses build strong brands that their competitors can't tarnish. This creates a strong and durable competitive advantage.
Now let's take a look at the three largest consumer-goods holdings in Berkshire Hathaway's stock portfolio.
Kraft Heinz is a true conglomerate in its industry, so it should be no surprise that it's a major investment for Berkshire Hathaway, which is also a conglomerate. A massive $45 billion merger brought Kraft and Heinz together. Berkshire fully supported the deal and now owns approximately 325 million shares of the company. This is a massive investment; Berkshire's stake is worth $28.81 billion. It is the largest investment for Berkshire, at 22% of its stock portfolio.
The merger has opened up a significant opportunity for the combined company to cut costs. Since Kraft and Heinz were nearly identical companies with extremely similar manufacturing and distribution processes, there was a lot of potential synergies between the two. The benefits of these cost synergies are already being felt. Kraft Heinz reported 39% growth in adjusted earnings per share in the second quarter.
After the merger, Kraft Heinz now has a huge product portfolio, with brands such as Kraft, Heinz, Jell-O, Maxwell House, Oscar Mayer and Planters. Kraft Heinz is now the fifth-biggest food and beverage company on the planet. It produces in excess of 200 brands that are sold in more than 200 nations worldwide. And Kraft Heinz has eight individual brands that each rake in at least $1 billion in sales every year.
With such a broad international footprint, unfavorable currency fluctuations are weighing on the company. Because of the rally in the dollar, foreign exchange wiped out four full percentage points of revenue growth last quarter.
One way the company is coping with the currency headwind is by raising prices. Kraft-Heinz's revenue was boosted by 2% in the second quarter due to price increases. Pricing power is a key source of strength for a consumer products company. Kraft-Heinz has a 2.7% dividend yield, and recently increased its dividend by 4%.
Coca-Cola is Berkshire Hathaway's third-largest investment. Berkshire owns 400 million shares of the company, worth $18.13 billion at current market prices.
Consumers in the U.S. are drinking less soda, and last year the company reported a 4% decline in total revenue. Still, Coca-Cola generated $7.98 billion of free cash flow in 2015 and paid $5.7 billion in cash dividends during the year.
Coca-Cola is hoping to offset the decline in U.S. soda consumption with growth in international markets and through new product categories. The good news is that it is making significant progress in its key growth initiatives.
Earlier this year, Coca-Cola made an investment in Chi Ltd., Nigeria's leading dairy and juice company. Coca-Cola purchased a 40% stake in the company and plans to fully acquire the company by 2019. This will give Coca-Cola a fast-track into Africa, a premier emerging market.
These strategies are starting to pay off. Coca-Cola's performance has improved to start 2016. Global volume rose 1% in the first half of the year, and the company expects organic revenue to grow 3% for the full year.
Coca-Cola stock might not be a screaming bargain. Shares trade for a price-to-earnings ratio of 25, which is in line with the S&P 500 index's P/E.
But with Coca-Cola's brand strength and high profitability, it makes sense that investors are willing to pay a premium price for a company of such high quality.
Coca-Cola sports a hefty 3.3% dividend yield, which is a satisfying yield for investors thirsty for income in a low-rate environment. And, Coca-Cola is the gold standard for dividend growth.
Coca-Cola is a Dividend King. It has paid a cash dividend to shareholders since 1920 and has increased its dividend every year for the past 54 straight years.
Last but not least, Buffett owns 15.1 million shares of technology giant Apple, worth $1.46 billion. Buffett is arguably the most famous value investor of all time, and Apple is a quintessential value stock.
Shares trade for a trailing P/E ratio of 12.6 and a forward price-to-earnings ratio of just 12.2. The stock is significantly discounted compared with the broader market.
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Plus, Buffett has professed a fondness for stocks that generate high returns on capital and free cash flow. With that in mind, Apple is a great pick for Berkshire, as Apple generated $69.78 billion of free cash flow last fiscal year alone.
Another key aspect of value investing is looking for margins of safety, which protect investors against potential downside risk. Not only does Apple have one of the most valuable brands in the world and generate huge levels of free cash flow, but it has an iron-clad balance sheet.
Apple ended last quarter with $232 billion of cash, short-term marketable securities and long-term assets on its balance sheet.
The market is pricing in very little growth for Apple next year, but the company's recently released iPhone 7 could be an exciting catalyst, since the iPhone makes up more than half of Apple's total revenue.
Another catalyst is Apple's booming services business, driven by the App Store and iTunes. Apple's services business set a record for the company last quarter with $5.98 billion in sales, up 19% year over year. Total services revenue has eclipsed $23 billion in the trailing four quarters.
Apple sports a 2.1% dividend yield, which is about on par with the S&P 500. That's not too shabby, and a nice bonus is that Apple has pledged its intent to raise the dividend by at least 10% each year going forward.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.