Sunday, January 26

Month 103 - Berkshire Hathaway's A-rated "Value" Stocks with High Dividend Yields - January 2020

Situation: In case your reason for buying stocks in your working years is to have growing income from dividends in your retirement years, we suggest that you prioritize “value stocks.” The bible of value investing is a book (The Intelligent Investor) written by Benjamin Graham, who was Warren Buffett’s instructor while Warren was earning his Master of Science in Economics degree at Columbia University. 

Why value investing, and what is a value stock? The main idea is to not overpay for either Earnings Per Share (EPS over the trailing twelve months, abbreviated ttm) or Book Value per share in the most recent quarter (abbreviated mrq). 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 [per share] below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb, we suggest that the product of the [EPS] multiplier times the ratio of price to book value should not exceed 22.5.” That is, 1.5 x 15 = 22.5.

How do you calculate the “Graham Number” -- the “rational” stock price listed in Column AA of the Table? It is the square root of 22.5, times (Earnings Per Share for the ttm), times Book Value per share for the 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 average 7-year Earnings Per Share (see page 159 of The Intelligent Investor), c) 3 times Book Value per share (ttm), and d) 3 times sales per share (mrq). If a company meets 3 out of 4 of those criteria, we call its stock a “value stock” in Column AF of the Table

Berkshire Hathaway’s stock portfolio contains 48 holdings worth $214,673,311,000 as of the last 13F SEC filing dated 11/14/19. The top 5 holdings (AAPL, BAC, KO, WFC, AXP) are worth ~$142B (66% of the total). We rate 8 of the 48 as being high-yielding “value” stocks (KO, PG, JPM, JNJ, TRV, USB, PNC, WFC), in that those companies meet an additional 4 criteria we like to use: 1) their bonds are rated A- or better by Standard & Poor’s (S&P), 2) their stocks are rated B+/M or better by S&P, 3) their stocks have the 16+ year trading record that is required for quantitative analysis using the BMW Method, and 4) their stocks are listed in both the iShares Russell 200 Value Index (IWX) and the Vanguard High Dividend Yield Index (VYM). You’ve probably figured out, by this point, that I’m encouraging you to think along these lines when building your own portfolio of retirement stocks. You can get a feel for the process by looking at 8 such stocks Warren Buffett has picked for Berkshire Hathaway’s portfolio.

Mission: Update our Month 98 blog, using our Standard Spreadsheet to analyze value stocks in Berkshire Hathaway’s stock portfolio.  

Execution: see Table.

Administration: The 10 largest positions in Berkshire Hathaway’s portfolio are:

Apple AAPL ($56B)
Bank of America BAC ($27B)
Coca-Cola KO ($22B)
Wells Fargo WFC ($19B)
American Express AXP ($18B)
Kraft Heinz KHC ($9B)
U.S. Bancorp USB ($7B)
JPMorgan Chase JPM ($7B)
Moody’s MCO ($5B)
Delta Air Lines DAL ($4B)

Six of those 10 are are either not high-yielding stocks or not “value” stocks (AAPL, BAC, AXP, KHC, MCO, DAL). Data for those 6 companies can be found in the BACKGROUND Section of the Table

A system for buying stocks can be boiled down and presented in a spreadsheet, as long as you realize that it omits assumptions used to estimate intrinsic value. But our Standard Spreadsheet won’t go far in helping you decide to sell a stock. All we have to go by is that Warren Buffett has told us he might sell for two reasons: 1) When a higher return is expected by trading to another asset (to include the loss incurred by capital gains tax); 2) When the company changes its fundamentals. He has also named two stocks he would never sell: Coca-Cola (KO) and American Express (AXP). American Express didn’t make our list for two reasons: 1) the S&P Rating for the company’s bonds is BBB+ as opposed to our minimum requirement of A-, and 2) the company is not in the Vanguard High Dividend Yield Index ETF VYM.

Bottom Line: The 8 A-rated high-yielding value stocks account for $57B (27%) of Berkshire’s stock portfolio. Five of those are in the Financial Services industry (Warren Buffett’s area of expertise). Take-home points include a) don’t overpay for a stock, b) buy what you know, and c) remember that the best bargains are to be found in the Financial Services industry. But note that all 4 of his bank stocks have above-market volatility in share prices (see Column I in the Table), which goes far toward explaining why they’re underpriced (average P/E = 13). Also note that while Coca-Cola (KO) and Procter & Gamble (PG) seem overpriced (see Columns AB-AH in the Table), you’d need to consider intrinsic value before coming to that conclusion.  

Risk Rating: 6 (where 1 = 10-yr US Treasury Notes, 5 = S&P 500 Index, and 10 = gold bullion) 

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

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

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

Sunday, December 29

Month 102 - A-rated Stocks in Vanguard’s Wellesley Income Fund (VWINX) - December 2019

Situation: For retiree savings accounts, most of the financial advisors that I follow prefer that half be allocated to bonds and the rest to stocks that reliably pay an above-market dividend. There is a convenient, low-cost way to anchor one’s portfolio in that direction, which is to invest in VWINX -- Vanguard’s Wellesley Income Fund. The managers allocate almost 60% to bonds and the rest to stocks that have been selected from the FTSE High Dividend Yield Index. Vanguard markets the U.S. version with the stock ticker of VYM. The ~400 stocks in VYM are selected from the Russell 1000 Index of large-capitalization companies (IWB). 

As a prospective retiree, you’ll want a balanced portfolio--one with approximately a 50:50 balance between stocks and bonds. The transaction costs for buying a corporate bond are high so you’ll want a mutual fund with a mix of government bonds and corporates. For stocks, you have the option of picking your own while keeping transaction costs (expense ratio) at ~2%/yr. But the expense ratio is much lower if you leave stock picking to professional managers (or computers) and opt for a mutual fund or Exchange-Traded Fund (ETF). The easy way to start is with VWINX, which has an expense ratio of 0.23%, and a 10-yr total return of 9.7%/yr. That’s 60% bonds, so supplement it with a stock mutual fund, stock ETF, or stocks of your own choosing. The Fidelity Balanced Fund (FBALX) is also weighted 60:40 in favor of bonds, also has a 10-yr total return of 9.7%/yr, but has a higher expense ratio of 0.53%. VWINX lost 9.8% in 2008 while FBALX lost 31.3%. That difference occurs because stock managers at VWINX are required to confine their selections to the ~400 companies in the FTSE High Dividend Yield Index while managers at FBLAX opted for a wide range of stocks typifying the S&P 500 Index. In other words, VWINX lost much less in the 2008 stock market crash because it held bond-like stocks. For a detailed analysis that compares VWINX to other balanced funds, read this Seeking Alpha article.

Mission: Use our Standard Spreadsheet to analyze companies in VWINX that have: 1) an S&P bond rating of A- or better, 2) a S&P stock rating of B+/M or better, 3) the 16+ year trading record needed for quantitative analysis by the BMW Method, and 4) are found in the current list of companies in the Vanguard High Dividend Yield Index

Execution: see the 26 companies in this week’s Table.

Administration: We have emphasized the safety features inherent in confining stock selections to companies in the S&P 100 Index. The managers of VWINX apparently agree, given that 17 of their 26 selections (see Column AK in the Table) are in that index. 

Bottom Line: We offer this view of stocks picked by managers at VWINX because that fund serves as a beacon for retirees. It has had only 5 down years in the past 40, and was down only 9.8% in the Great Recession of 2008. Since inception on 7/1/1970, it has returned 9.7%/yr

Risk Rating: 4, where 10-year US Treasury Notes = 1; S&P 500 Index = 5; gold bullion = 10.

Full Disclosure: I dollar-average into PFE, NEE, INTC, PG, JPM, JNJ and CAT, and also own shares of CSCO, DUK, KO, PEP, TRV, MMM, BLK and XOM.

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

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com