Sunday, August 25

Month 98 - Berkshire Hathaway’s A-rated High Dividend Yield “Value” Stocks - August 2019

Situation: In case your reason for buying stocks in your working years is to have a growing income from dividends in your retirement years, this blog has emphasized “value stocks.” The bible of value investing is Benjamin Graham’s book: The Intelligent Investor. His most famous student is Warren Buffett, who graduated from Columbia University in 1951 with a Masters Degree in Economics. 

Why value investing, and what is a value stock? The central thought is to discipline yourself not to overpay for earnings and/or assets (“book value”). On page 349 of the Revised Edition (1973) of The Intelligent Investor, Benjamin Graham says “Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb, we suggest that the product of the [earnings] multiplier times the ratio of price to book value should not exceed 22.5.” In other words, 1.5 times 15 equals 22.5.

How do you calculate the “Graham Number” or rational stock price? It is the square root of 22.5 times Earnings Per Share for the Trailing Twelve Months (TTM) times Book Value per share for the most recent quarter (mrq). We suggest that you think of the share price of a value stock as being no greater than: a) twice the Graham Number, b) 25 times the 7-year average for Earnings Per Share (see page 159 of The Intelligent Investor), and c) no more than 4 times Book Value per share. When you purchase a stock meeting those 3 requirements, it is demonstrably worth what you paid for it. The details are shown in Columns AA-AE of Tables accompanying our recent blogs. 

Berkshire Hathaway’s stock portfolio contains 46 holdings worth $201,828,368,888 as of the last 13F SEC filing dated 8/14/19. The top 5 holdings (AAPL, BAC, KO, AXP, WFC) are worth $133,600,000,000 (66% of the total). Eight of the 46 companies have issued A-rated value stocks, since the company meets the following 4 criteria: 1) its bonds are rated A- or better by Standard & Poor’s (S&P), 2) its stocks that are rated B+/M or better by S&P, 3) its stocks have the 16+ year trading record that is required for quantitative analysis using the BMW Method, and 4) its stocks are listed in both the iShares Russell 1000 Value Index (IWD) and the Vanguard High Dividend Yield Index (VYM). 

The top 10 stocks in Berkshire Hathaway’s portfolio, listed by valuation, are:

Apple AAPL ($51B)
Bank of America BAC ($25B)
Coca-Cola KO ($21B)
American Express AXP ($19B)
Wells Fargo WFC ($18B)
Kraft Heinz KHC ($8B)
U.S. Bancorp USB ($7B)
JPMorgan Chase JPM ($6B)
Moody’s MCO ($5B)
Delta Air Lines DAL ($4B)

Mission: Use our Standard Spreadsheet to analyze value stocks in the portfolio, based on the 4 criteria listed above.  

Execution: see Table.

Administration: Six of the top 10 stocks in the portfolio are not value stocks (AAPL, BAC, AXP, KHC, MCO, DAL). Data for those can be found in the BACKGROUND Section of the Table.

Bottom Line: The 8 A-rated value stocks account for $54 Billion (27%) of the portfolio’s value. These show that Warren Buffett’s area of expertise is not only value stocks generally but financial services stocks specifically, since 5 of the 8 companies are from that industry. The take-home points for retail investors are: a) don’t overpay for a stock, b) buy what you know, and c) remember that the best bargains are often in the Financial Services industry. But those stocks also tend to have the greatest volatility, which is a key reason why they are underpriced.

Risk Rating: 7 (where 1 = 10-year U.S. Treasuries, 5 = S&P 500 Index, and 10 = gold bullion) 

Full Disclosure: I dollar average into KO, PG, JPM and JNJ, and also own shares of AAPL and TRV.

"The 2 and 8 Club" (CR) 2017 Invest Tune All rights reserved.

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Sunday, July 28

Month 97 - Members of "The 2 and 8 Club" in the Russell 1000 Index - July 2019

Situation: The idea here is to “beat the market” by making selective purchases of individual stocks. This is a delusion, given that the odds are less than 1 in 20 that a professional trader will (over any 10-year period) beat VOO--the ticker for the lowest cost S&P 500 Index Fund, which has an Expense Ratio of 0.03%. VOO is marketed by Vanguard

Since you have to actively trade stocks to even come close to beating VOO, trading costs will relentlessly keep you from beating the market. Those costs include brokerage fees, commissions, research time & expense, and capital gains taxes. So, this month’s blog is about an interesting game, like tennis or marriage: When you lose, you’re a fool if you take it personally.  

Mission: Run our Standard Spreadsheet for high-quality stocks in the Russell 1000 Index that have a good and growing dividend. High quality means an S&P bond rating of A- or better. A good dividend is one that gets the stock into the Vanguard High Dividend Yield Index Fund (VYM). A growing dividend is one that has been 8.0%/yr (or better) over the past 5 years.

Execution: see Table.

Bottom Line: You’re toast. It isn’t going to happen. But you’ll come close to beating the market if you avoid making abstract considerations and instead follow concrete markers, such as avoiding stocks with a dividend yield plus dividend growth rate of less than 10%. And, find a way to quickly decide whether a stock is overpriced. For example, you can ask your broker if Morningstar rates the stock as being “overvalued”. Or, you can calculate the Graham Number on your smartphone. The Graham Number is what the stock’s price would be at 15 times Earnings Per Share for the trailing 12 months (TTM), multiplied Book Value for the most recent quarter (mrq). This is a power function (15 times 1.5 equals 22.5). So, you have to multiply those numbers (for the stock in question) by 22.5 before taking the square root, which is the stock’s rational price. If the stock is selling for more than 2.5 times the Graham Number, it is overpriced (see the numbers highlighted in purple at Column AB of the Table). In other words, many investors want to own the stock but relatively few owners want to sell it. You should wait for this fever to break before buying shares.

Risk Rating: 6 (where a 10-year US Treasury Note = 1, S&P 500 Index = 5, and gold = 10)

Full Disclosure: I dollar-average into NEE, JPM, CAT and IBM, and also own shares of CSCO, AMGN, TRV, CMI, MMM and BLK.

"The 2 and 8 Club" (CR) 2017 Invest Tune All rights reserved.

Post questions and comments in the box below or send email to: