7: Wells Fargo & Co (NYSE:WFC)
Percent of Warren Buffett’s Portfolio: 18.0%
Dividend Yield: 3.2% Forward P/E Ratio: 11.7x (as of 5/16/16)
Sector: Financials Industry: Major Regional Banks
Dividend Growth Streak: 5 years
Wells Fargo & Co (NYSE:WFC)’s roots can be traced back to the 1850s, and the company has since grown to be the nation’s third-largest bank by assets. Wells Fargo runs 90 business lines across a mix of banking, insurance, mortgage, investment, and consumer & commercial finance services.
Overall revenue is split almost equally between traditional loan-making operations (53% of sales) and noninterest income (47%) from brokerage advisory services, credit card fees, commissions, mortgage originations, and more.
Unlike most of its big bank peers, Wells Fargo has little involvement with investment banking and trading operations and instead chooses to focus on basic lending businesses that are generally thought to have less risk.
Wells Fargo is Warren Buffett’s biggest holding and accounts for nearly 20% of Berkshire Hathaway’s portfolio. Buffett began accumulating shares of Wells Fargo in 1989, when pessimism surrounding bank stocks was extremely high.
At the time, Buffett made his investment in the company because he was very impressed with its management team.
Banking can be a disastrous business to invest in if reckless loans are issued, so the company’s management and culture are extremely important factors. In the case of Wells Fargo, it is still thought to be the highest quality and most conservatively managed bank today.
Buffett also probably likes Wells Fargo for the long haul because it possesses major cost advantages over its smaller peers. The bank has more retail deposits than any other bank in America and has seen its total deposits grow from $3.7 billion in 1966 to $1.2 trillion in 2015.
Wells Fargo & Co (NYSE:WFC) only pays 8 basis points on its deposits, which allows its lending operations to make money in virtually any interest rate environment.
As the U.S. economy continues expanding, Wells Fargo should be able to mint money with its loan book and continue earnings superior returns on equity relative to its peers.
Read More: Our Analysis of Wells Fargo
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8: Phillips 66 (NYSE:PSX)
Percent of Warren Buffett’s Portfolio: 5.1%
Dividend Yield: 3.2% Forward P/E Ratio: 14.0x (as of 5/16/16)
Sector: Energy Industry: Oil Refining & Marketing
Dividend Growth Streak: 3 years
Phillips 66 (NYSE:PSX) was spun off from ConocoPhillips in 2012 and generates the majority of its profits from refining oil, marketing refined petroleum products such as gasoline, and selling various chemicals such as plastics that are made from oil.
Phillips 66 is one of Berkshire Hathaway’s larger holdings. Warren Buffett was previously invested in ConocoPhillips, which spun off Phillips 66 in 2012. He subsequently sold out of his stake in ConocoPhillips and has consistently been increasing his stake in Phillips 66.
Phillips 66 is benefiting from the drop in oil prices because oil is a major input cost for its refining operations. Since the price of gas hasn’t fallen as much as the price of oil, the company’s refining operations are enjoying profit increases.
However, Warren Buffett doesn’t buy stocks for short-term profits. When he makes an investment, he plans to hold on forever.
In the case of Phillips 66, Berkshire Hathaway is likely excited about the company’s plan to reshape its business and capitalize on the North American energy renaissance.
Management is investing in midstream and chemicals operations to drive future growth, which will make the business less dependent on refining and provide more balanced cash flows.
As this plays out, Phillips 66 (NYSE:PSX)’s businesses should benefit from growing North American energy production and see their collective earnings power rise.
