It's hard to go wrong investing in companies that Warren Buffett owns. His acumen for finding great long-term investments is unparalleled, and he has the track record over the years to prove it.
So in the spirit of the Oracle of Omaha's brilliance, we asked three of our contributors to highlight a stock currently held in the Berkshire Hathaway portfolio worth buying today. Here's why they picked oil and gas pipeline company Kinder Morgan (NYSE:KMI), telecommunications giant Verizon Communications (NYSE:VZ), and industrial manufacturer General Electric (NYSE:GE).
Powering your portfolio to new heights
Sean Williams (Kinder Morgan): Following a pretty miserable three-year stretch, the Warren Buffett stock that looks like an intriguing buy this February is midstream giant Kinder Morgan.
The rapid decline in crude oil and natural gas prices punished Kinder Morgan in 2015 and early 2016. The company, which is responsible for moving about 40% of all natural gas in the U.S., became a target of skeptics, given the high levels of debt it had built up by expanding its leading pipeline network. When commodity prices fell, there was concern that Kinder Morgan's backlog and ability to net future deals would falter. These concerns were further magnified when it cut its dividend payout by 74% in December 2015.
But there are reasons to believe that its balance sheet has improved dramatically, and that it's healthier than it's been in years as a company. Kinder Morgan wound up jettisoning a number of non-core assets last year, which, when combined with its dividend cut that'll save the company more than $3 billion a year in distributions, allowed it to handily reduce its outstanding debt. Between the beginning of 2015 and the end of the third quarter of 2016, Kinder Morgan chopped about $3.9 billion off its outstanding debt load, reducing it to $38.5 billion and likely saving face with investors and credit agencies. Best of all, there's probably no need to tap equity markets, given the operating cash flow from its existing pipelines and its now reduced debt levels.
The other factor to really like about Kinder Morgan is that 91% of its cash flows are fee-based in 2017, and 97% overall is fee-based or hedged. In other words, it has very little exposure to what's been a pretty volatile crude and natural gas market over the past three years. Given the long-term nature of the company's contracts, it's able to generate pretty predictable cash flow each and every quarter.
With crude and natural gas prices stabilizing in recent months, and President Donald Trump seeming to favor a strong domestic energy industry, Kinder Morgan could be the perfect Buffett stock for investors to consider scooping up in February.
A boost from deregulation and a business-friendly FCC
Jamal Carnette, CFA (Verizon Communications): In 2014, when it was disclosed that Warren Buffett had purchased a stake in Verizon, the general reaction was one of bewilderment. On the surface, there were a host of red flags that would make the average value investor nervous. First off, at that time Verizon was less than a year removed from the largest corporate bond issuance ever, a balance sheet-busting $49 billion offering. Second, earlier that year Big Red had issued 1.3 billion shares, watering down existing shareholders. Finally, Verizon had averaged top-line growth of only 2.8% in the aftermath of the Great Recession.
An astute financial writer (spoiler alert: It was me) summed up the purchase by asking, "Has He Lost His Mind?" (Second spoiler alert: no). Of course, we know Buffett is no average value investor.
I also have to point out the reason for the share and debt issuance -- Verizon didn't fully own its cash-cow Verizon Wireless business. The cash was needed to buy Vodafone's 45% stake. At the time, CEO Lowell McAdam estimated that the transaction would boost earnings 10%. Since then, however, the wireless industry has become more competitive, as upstart T-Mobile has been effective at lowering prices and instituting other consumer-friendly policies that have hit industry margins.
T-Mobile's market dynamic-changing run almost didn't occur. In 2011, the Federal Communications Commission rejected AT&T's bid for T-Mobile because of concerns over a concentrated market. In 2014, the FCC again disallowed another suitor, this time Sprint, from purchasing T-Mobile, in an effort to protect consumers. It's likely the new FCC will be friendlier to mergers, and Bloomberg reports that Sprint remains an interested buyer. An acquisition will not be good for consumers, but it should help alleviate pricing pressures in the wireless industry, which is something Verizon shareholders would welcome.
In addition, the new FCC chairman, Ajit Pai, is a fierce opponent of net neutrality. As an internet service provider (ISP), Verizon is well positioned to take advantage of any watering down of these rules. Verizon now owns a host of digital properties and could better take advantage of both content and delivery if the net-neutrality rules are repealed. There will be losers for sure, though, most notably small bloggers and digital publishers, as power would shift to ISPs and larger publishers.
Still, a recent poor quarter from Verizon gives long-term investors a great entry point. Currently, the stock trades at a price-to-earnings ratio of 14 times earnings with a dividend yield of 4.7%. For value investors in the vein of Buffett, Verizon looks appealing at these levels.
Buffett betting on the Internet of Things?
Tyler Crowe (General Electric): Buffett isn't a huge fan of technology stocks. Yet there's one company in his portfolio that's making a big bet on one of the hottest technology trends today: the Internet of Things. Sure, General Electric's developing Predix analytics platform and cloud-based services aren't the kind of technologies you and I will use every day, but its industrial applications will probably have a profound impact on how we operate machinery for decades to come.
Predix, and General Electric's more broad strategy of creating an Industrial Internet of Things, is looking to completely change the way we think about things such as maintenance and operational efficiency. As the software platform's name suggests, it's able to predict maintenance issues before they happen, and run systems such as power generators at rates that optimize efficiency thanks to remote sensing and some serious cloud-computing capacity. This ability has been shown to save GE customers millions in maintenance costs, which makes it such a compelling business segment for GE.
Management estimates that its Predix software and data-analytics business segment will bring in $15 billion in annual revenue by 2020. This business has also been shown to be a much higher-profit-margin business than its typical manufactured products are. If this business segment can achieve these lofty goals, then things will be looking pretty good for General Electric investors.
I'm sure that when Buffett made his initial investment in the company, Predix wasn't really part of the equation. Now that it is, though, it should give him all the more reason to hang on to this stock. It also makes GE a compelling investment for anyone else today.
Jamal Carnette owns shares of AT and T and General Electric. Sean Williams has no position in any stocks mentioned. Tyler Crowe owns shares of Berkshire Hathaway (B shares), General Electric, and Verizon Communications. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Kinder Morgan. The Motley Fool owns shares of General Electric. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.