The Hidden Dividend Stock That Berkshire Just Bought

Warren Buffett, the so-called Oracle of Omaha, knows a thing or two about investing. That's why it was huge news when Buffett announced last week that his company, Berkshire Hathaway (NYSE: BRK-B  ) , had purchased a total of 5.5% of IBM (NYSE: IBM  ) , an investment worth $10.7 billion.

The headlines were predictable. "Buffett Changes His Philosophy, Buys Tech Stock." "Should You Follow Buffett into IBM?"

But lost in the IBM shuffle were Berkshire's other (albeit smaller) moves. Berkshire also opened new positions in several companies, including Intel (Nasdaq: INTC  ) , and Visa (NYSE: V  ) . Berkshire purchased 9.3 million Intel shares valued at $199 million and 2.29 million shares of Visa worth $196 million.

However, another such "small" move by Buffett's firm has me the most excited. That's because it's a solid company with a strong dividend. Which Berkshire pick am I putting a bullish CAPScall on today?

Boom!
That'd be General Dynamics (NYSE: GD  ) . Berkshire has purchased 3.1 million shares of General Dynamics since March for $174 million. General Dynamics is a well-established defense contractor that's been around since 1899 and pays a solid (and steady) 2.9% dividend. GD is also cheap -- it's currently trading at less than 9 times earnings. Why is that?

S&P 500 Stock Chart

S&P 500 Stock Chart by YCharts

Over the past year, GD was beating the S&P 500 before summer began. However, after May, GD trails the S&P fairly substantially and winds up down about 7% so far this year versus the S&P.

It looks as if the market has beaten GD and other defense contractors down because of the possibility of defense cuts. That's been a worry for owners of these stocks for a while, but this summer was when the talk about cutting defense spending really started to heat up. Coincidentally, that's exactly where GD opens a prolonged negative spread against the S&P.

You're nuts!
You might be calling me crazy for giving a defense contractor a thumbs-up right now, especially after the epic (though not unexpected) failure of the congressional "supercommittee" to reach a long-term debt deal triggered up to $600 billion in further defense cuts over 10 years, beginning in 2013.

Time to invoke more Buffett. This time a vintage quote from the man himself: "Be fearful when others are greedy, and greedy when others are fearful."

I believe that the debt crisis and subsequent decline in GD's stock price has created an opportunity for investors to buy GD for cheaper than they otherwise could.

Sure, about 72% of GD's 2010 revenues came from the U.S. government. And that might be a scary stat given the current political climate. But once you compare that number with those of GD's competitors, it gets a little bit more palatable.

Lockheed Martin (NYSE: LMT  ) , the world's biggest defense contractor, received 84% of its 2010 revenues from the U.S. government. And Northrop Grumman (NYSE: NOC  ) had the U.S. government account for a whopping 92% of its 2010 revenues.

So even though GD does get the majority of its revenues from the government, it is better diversified than many of its big defense-contractor competitors, mainly because of its successful Gulfstream business jet segment.

GD also has many of its defense contracts in areas that are assumed to be less likely to be cut. Through its Electric Boat segment, GD has been the primary builder of submarines for the U.S. Navy for more than 100 years. The company continues to churn out subs at a steady pace, with marine systems accounting for a total of $3.6 billion in revenue for the company in 2010.

Luckily for GD, when you're the No. 1 maker of submarines, you get paid to fix them as well. To that end, GD was recently awarded an additional $429 million as part of a $1.2 billion contract for nuclear-sub support work. It pays to be No. 1.

Foolish bottom line
I believe that fears over defense cuts are overblown, especially for a company like GD. America will always spend whatever it takes to defend itself. Count me among those who don't think we'll see $600 billion cut from defense spending. Moreover, GD is a rock-solid dividend stock with a long track record. Don't expect a 10-bagger here, but trading at less than 9 times earnings, this stock is oversold -- and that's why I'm giving it a thumbs-up in My CAPS portfolio today.

If you're looking for solid dividend stocks to add to your portfolio but concerned about defense cuts, I invite you to grab a copy of our free report, "13 High-Yielding Stocks to Buy Today." These stocks from various industries were hand-picked by our team of analysts for their superior dividend performance. There's no catch -- grab this report right now for free!

Fool contributor Brendan Byrnes owns no shares of any of the companies mentioned here. The Motley Fool owns shares of Lockheed Martin, Intel, Northrop Grumman, IBM, General Dynamics, and Berkshire Hathaway and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Intel, and Visa and creating a bull call spread position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (13)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 28, 2011, at 10:16 AM, BandonDunes wrote:

    Brendan-

    I hate to burst your bubble but Visa, Intel and most likely General Dynamics were purchased by Todd Combs, not Buffett.

  • Report this Comment On November 28, 2011, at 11:33 AM, DangerousDave8 wrote:

    Buffett also purchased Bank of America in August... now its trading at $5.39...

  • Report this Comment On November 28, 2011, at 12:51 PM, buffalonate wrote:

    This guy didn't bother to do basic research. Buffett said last week that he doesn't make trades of less than 1 billion. This proves that the Visa, Intel, and other smaller purchases were the work of Combs. People will use any reason to put Buffett's name in the headline in the article so people will look at it. Anybody who knows Buffett knows this article is garbage.

  • Report this Comment On November 28, 2011, at 2:03 PM, TMFNiner wrote:

    While you are correct that (most likely) these investments were purchased by Todd Combs, my point was that Buffett is largely synonymous with Berkshire since it's his company. However, I've decided to change the title of the article to make it more clear.

    Also, DangerousDave8, while Bank of America has been down since Berkshire bought it, it's important to remember that Berkshire purchased preferred BOA stock that pays a 6% annual dividend, and received warrants for 700 million shares that can be exercised over the next 10 years. Not exactly the same as you or I buying BOA stock in August.

    Thanks for reading!

    Brendan

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