19: M&T Bank Corporation (NYSE:MTB)
Percent of Warren Buffett’s Portfolio: 0.5%
Dividend Yield: 2.5% Forward P/E Ratio: 13.9x (as of 5/16/16)
Sector: Financials Industry: Major Regional Banks
Dividend Growth Streak: 0 years
M&T Bank Corporation (NYSE:MTB) was established in 1856 and is one of America’s largest 20 commercial banks. Its 800+ domestic branches span across eight states mostly located in the eastern half of the U.S.
The company acquired Hudson City Bancorp in late 2015 for $5.2 billion, increasing its loan portfolio by nearly 30% while providing meaningful opportunities for cost savings and growth in adjacent markets.
The deal further improves M&T regulatory capital ratios, was immediately accretive to book value per share, and offers an attractive internal rate of return of about 18%.
M&T has been one of Berkshire Hathaway’s stock picks since Buffett bought preferred stock in the company back in 1991. His shares later converted into common stock about five years later.
M&T has a long history of conservative risk management practices. The company has enjoyed relatively low earnings volatility due to its careful credit underwriting and also benefits from the diversity of its operations, which include wealth and fiduciary units.
As a result, M&T has consistently outperformed its peers as measured by profitability, efficiency, and net charge-off ratios. The company has also grown its net operating earnings per share by 15% per year since 1983, steadily compounding its value.
Shareholders have also been rewarded over this time period, enjoying 13% annualized dividend growth since 1983 and an annual total return of 18.9% since 1980 – that’s the 24th best return of all U.S.-based stocks that traded publicly since 1980.
Warren Buffett likes to own the best companies in a particular industry, and M&T Bank Corporation (NYSE:MTB) sure makes a strong case. The business is one of the safest banks that money can buy and has demonstrated an excellent ability to consistently grow earnings over time.
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20: Seritage Growth Properties (NYSE:SRG)
Percent of Warren Buffett’s Portfolio: N/A (Buffett bought SRG personally)
Dividend Yield: 2.2% Forward P/E Ratio: N/A (as of 5/16/16)
Sector: Financials Industry: Commercial REIT
Dividend Growth Streak: 0 years
Seritage Growth Properties (NYSE:SRG) was spun off from Sears Holdings in July 2015 and purchased over 260 Sears and Kmart stores from the retailer for just under $3 billion. This deal was done to help Sears improve its cash position and reduce costs.
Seritage leased back all but 11 of its properties to Sears. As a REIT, Seritage makes money by collecting rent checks each month from its tenants. Today, Sears and Kmart stores account for almost 80% of Seritage’s rent revenue.
Unlike the other stocks on this list which are owned by Berkshire Hathaway, Warren Buffett personally purchased his 8% stake in Seritage Growth Properties in December 2015.
As most investors are aware, Sears is quickly fading into the horizon. Buying shares in a REIT that relies heavily on Sears today is indeed a curious move by Warren Buffett. He must see something else.
Most likely, Warren Buffett likes Seritage’s valuation because the REIT is gradually re-leasing space from Sears to third-party retailers for much higher rent rates than what the company is currently receiving from Sears for its properties.
In other words, the company’s current earnings are being significantly held back by its leases with Sears. As its mix of tenants improves to include more third-party retailers such as Nordstrom and Dick’s Sporting Goods, Seritage’s earnings power should meaningfully improve. Buffett probably sees high value in the prime retail locations owned by Seritage and believes the company is under-earning.
Buffett also likes boring, predictable businesses, and many commercial REITs fit the bill. Cashing rent checks each month is not a bad business by any means, and prime retail locations should presumably rise in value over time to further enhance Seritage Growth Properties (NYSE:SRG)’s worth.
As the company begins to unlock the value of its real estate, the stock could do well and provide strong dividend growth for many years to come.
