He’s called the Oracle of Omaha for good reason. Warren Buffett, Berkshire Hathaway‘s (NYSE:BRK.A) (NYSE:BRK.B) longtime CEO, earned that nickname because of his company’s envious propensity to pick winning companies to invest in.
Although every year isn’t a market-beating one, Berkshire Hathaway’s 56-year (and counting) performance record easily exceeds that of the S&P 500 (SNPINDEX:^GSPC) (20% compound annual return versus 10.2%, respectively). The 91-year-old investing stalwart has proven he knows what he’s doing and any new investor would do well to emulate his investing patterns and pay attention to his advice.
Interestingly, doing so isn’t difficult. Berkshire Hathaway’s stock holdings are publicly disclosed every quarter, allowing enterprising investors to follow (and perhaps trade on) the company’s investment decisions, albeit on an after-the-fact basis.
In fact, here’s a look at three of Berkshire’s current bets and why they might be good choices for anyone looking to put some idle cash to work.
1. Merck & Co.
Berkshire Hathaway’s stake: 9.16 million shares/$671 million
There’s no denying Merck & Co. (NYSE:MRK) hasn’t been a particularly great performer of late; the stock price has been down on the order of 8% for the past 12 months versus the S&P 500‘s 34% gain for the same time frame. Most of that disappointing run can arguably be chalked up to the fact that Merck was never a real contender in the race to create a viable COVID-19 vaccine.
This relative weakness, however, is ultimately a buying opportunity.
Short-term, there is definitely a benefit to being in the business of developing a COVID-19 vaccine (especially as variants keep popping up). But long-term investors are probably better served by sticking with pharmaceutical companies focused on illnesses that aren’t likely to eventually be brought under control and eradicated, such as cancer.
Merck is one of these long-haul names, and its cancer-fighting Keytruda has only scratched the surface of its potential. As of last quarter, Keytruda’s annual revenue run rate stands at $16.7 billion, but some analysts foresee peak annual sales well in excess of $20 billion for the drug; some models even peg the figure closer to $30 billion.
And that’s just one of the drugs in its current portfolio. The research and development (R&D) pipeline’s pretty impressive too, with 25 different Phase 3 trials presently underway and three approval requests currently in the hands of the Food and Drug Administration (FDA).
Berkshire Hathaway’s stake: 158.8 million shares/$8.6 billion
Telecom giant Verizon Communications (NYSE:VZ) is anything but a growth machine, but what a dividend payer it is! The company has paid a dividend every quarter since 1984 when it was still Bell Atlantic, and it has also raised its annual dividend payout every year for the past 15 years. Clearly, the company is committed to providing good, reliable income to its shareholders. It may be motivated to up its yearly dividend for 25 consecutive years in order to qualify the company as a Dividend Aristocrat.
The underpinnings are certainly in place for such a development.
Think about it. Consumers might postpone the purchase of a new car or forego a vacation. But they typically keep their mobile phones connected to their respective networks. The business model is well suited for supporting reliable dividend payments as these consumers reliably pay their monthly bills. The key is simply keeping those customers from defecting to other providers and redirecting the recurring revenue they generate. And Verizon’s very good at keeping those paying customers on board. Last quarter, its prepaid wireless churn rate — the portion of its customers who cancel their service but are replaced by new customers — was less than 1%, while its postpaid churn rate was only 0.72%.
Verizon also operates a modest cable television and broadband business. Although its cable business isn’t all that sticky in this era of cord-cutting, Verizon’s high-speed internet business more than offset those attritions by growing its customer base by more than 7% year over year during the three-month stretch ending in June.
You can step into Verizon shares while the dividend yield is a healthy 4.7%.
Berkshire Hathaway’s stake: 4.56 million shares/$1.6 billion
Finally, add Mastercard (NYSE:MA) to your list of stocks Warren Buffett holds that you may want to own as well.
Given the recurring-revenue nature of the business (Mastercard is a credit- and debit-card payment middleman), one would expect this stock to be a major dividend-paying name that Buffett prefers to hold. But that’s just not the case. Mastercard’s inconsequential dividend yield of only 0.5% barely merits mentioning.
Just as surprising is the fact that this dividend-stingy company drives results that make it look more like a growth name instead of the value stock many investors might expect it to be. This year’s top line is expected to improve on last year’s numbers by more than 23%, but if you think that rapid growth is merely the result of pandemic-related spending changes, you should know that next year’s revenue is projected to be 20% better than this year’s, while 2019’s pre-COVID sales were 13% higher than 2018’s, and 2018’s top line was nearly 20% higher than 2017’s.
This incredible growth consistency is more a reflection of the company’s ongoing evolution. Mastercard is no longer just a card-payment facilitator; it’s a solutions provider, positioning itself for the new norms of consumerism. The adoption of blockchain for logistics, cryptocurrencies, and now the planned replacement of the magnetic strip on the back of all Mastercard cards with a more secure chip all illustrate how this company is thinking proactively about where its customers want to be and how they want to transact rather than being reactive. Throw in the world’s ever-decreasing use of cash, and Mastercard offers investors access to an incredibly bright future the company plans to operate in.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.