Instead of wondering who will become the next CEO of Berkshire Hathaway Inc. (NYSE:BRK.A) or what Warren Buffett wrote in his first tweet I think most investors, including me, would be more interested in the answers to questions like what companies he chooses and how he chooses them.
Q&A
The annual Berkshire shareholders meeting was held earlier this month, a “small” affair attended by 35,000 of the faithful in Omaha, Nebraska.
In addition to providing various financial information, it featured a five hour long question and answer period where Warren Buffett and Vice-Chairman Charlie Munger tried to impart their collective investing wisdom onto the masses.
Working together for nearly a half century, Buffett and Munger have identified companies ripe to be acquired at reasonable prices and brought into the Berkshire Hathaway Inc. (NYSE:BRK.A) stable, as well as individual stocks that have returned tons of value to shareholders.
The result has been fantastic. Over the last 13 years there has been a three-fold increase in Berkshire’s stock price while the overall market has been relatively flat.
Some of the companies Berkshire owns outright include GEICO, NetJets, Benjamin Moore, Burlington Northern Santa Fe, and Fruit of the Loom.
Warren Buffett always said that the minimum holding period for a stock should be “forever.” He looks for companies that do not trade much above their book value and keeps them as long as they keep delivering value.
Three stocks that made the grade, and remain part of Buffett’s widely diversified portfolio today, are The Coca-Cola Company (NYSE:KO), International Business Machines Corp. (NYSE:IBM) and The Procter & Gamble Company (NYSE:PG).
This Coke is for you
Part of the company’s success derives in part from great product recognition and a very wide economic moat. Who hasn’t heard of Coke? It is the world’s best-known and valuable brand, and is consumed in the vast majority of countries today.
Add in a great management team, lots of cash flow and a relatively inexpensive valuation compared to its peers and you get solid performance. You can’t go wrong owning Coke.
Speaking of dividends, The Coca-Cola Company (NYSE:KO) has been ratcheting them up every year for about half a century. Over the past 35 years each shareholder has collected a total of $29,300 for every $1,000 initially invested. Based upon its earning power and cash flow the company should be able to keep increasing them in the future.
Inventive technology
When talking about International Business Machines Corp. (NYSE:IBM), Mr. Buffett says he doesn’t care if the share price actually goes up. He is content reaping rewards from the company stock buyback efforts. If the price remains where it is or lower the company spends less money when repurchasing shares on the open market. That means more money for investors like Mr. Buffett.
Since 2000, International Business Machines Corp. (NYSE:IBM) has lowered its share count by a third, in the face of sluggish revenue growth. The remaining shares are now worth more and EPS has increased as the result.
And the company has still been able to pay and even bump up its dividend over the same time period. For each $1,000 of stock owned over the last 13 years, those quarterly payments have added up to $2,200; more than double the initial investment, and that’s not even considering the gain in the stock value itself.
International Business Machines Corp. (NYSE:IBM) has been successful in reinventing itself by getting out of the PC industry and into successful business-to-business services, such as “Big Data” and specialized software tools. It is the most innovative business around, at least when you consider that it received the most patents of any company since 2000. That can only lead to future growth and increased returns.
Tide, Crest and Pampers
The Procter & Gamble Company (NYSE:PG) sells things people need on a daily or weekly basis: laundry detergent, toothpaste, deodorant, diapers, shaving cream, etc.
Tons of cash flow in from those purchases and are used to fund the company’s ever-increasing dividend payments. Since 1956, Procter & Gamble has hiked its disbursement every year. Recently the board of directors announced that its next quarterly dividend will be 8% larger. That keeps up with inflation. Yes, The Procter & Gamble Company (NYSE:PG) is good for a retirement income account.
The company is innovative too. Last year, it revolutionized the laundry detergent business by developing the single-shot Tide Pod packet. The result was growth in the high-end of the market, which favors The Procter & Gamble Company (NYSE:PG) over its competitors. This and other inventions throughout the years have allowed the company to expand. I wouldn’t expect anything less in the future.
Conclusion
So we didn’t get an answer to a burning question at the Berkshire annual meeting; we still don’t know who will be the next CEO. However, if investors listened carefully at the shareholder’s meeting, they should have been able to gather a few tidbits of knowledge on how Warren Buffett and Charlie Munger pick stocks.
Maybe the next The Coca-Cola Company (NYSE:KO), International Business Machines Corp. (NYSE:IBM) or The Procter & Gamble Company (NYSE:PG) can be identified using the duo’s well-honed process of finding good value for the money and holding onto a stock as long as it keeps returning that value to shareholders through buybacks and dividend increases, in addition to price appreciation.
In fact, now that he is on Twitter, maybe Warren Buffett will parse out investing wisdom on a more regular basis so that we don’t have to wait until next year’s meeting.
The article 3 of Warren’s Favorite Stocks: IBM, Coca-Cola, and Procter & Gamble originally appeared on Fool.com and is written by Mark Morelli.
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