For retirees, Warren Buffett's portfolio offers plenty of solid companies with competitive advantages. Buffett gets it wrong sometimes, so investors shouldn't blindly mimic the billionaire's actions. But Buffett's positions are a good starting point for retirees. Here's why Apple (AAPL +1.18%), General Motors (GM +3.35%), and DaVita (DVA +22.61%) are three great Buffett stocks for retirees.
A cash machine
Brian Stoffel (Apple): Of all of the stocks Warren Buffett owns through Berkshire Hathaway, I think retirees should strongly consider buying shares of Apple -- and its current yield of 1.6% -- in May.
Without a doubt, the biggest risk Apple faces is commoditization. Over the past 20 years, the company has survived by consistently coming out with the Next Big Thing -- first Macs, then iPods, then the iPhone and iPad. That's not the most sustainable moat to rely on.
Image source: Apple.
At the same time, the stock's price tag already reflects that reality. While Apple has almost a quarter-trillion in cash on its balance sheet against very little debt, and it generated an astounding $53 billion in free cash flow last year, shares trade for just 17 times earnings, a 30% discount to the market writ large.
At the same time, the iPhone 8 is just around the corner, and bears who have been betting against the popularity of the device have been disappointed again -- and again, and again. I don't see any reason that will change this upcoming holiday season.
Given that only 23% of free cash flow was used to pay the dividend in 2016, I fully expect that retirees can count on increasing dividend checks from the company for year's to come -- and that's what retirement investing should be all about.
Too cheap to ignore
Tim Green (General Motors): Berkshire owns about $1.7 billion worth of General Motors, a stock that seems to be stuck trading at a pessimistic valuation. GM expects to produce between $6.00 and $6.50 in adjusted EPS this year, putting the forward P/E ratio around 5.5.
There's a good reason GM stock is cheap. The U.S. auto market, after years of strong growth, is hitting a wall. U.S. auto sales slumped 4.7% in April, and GM was not immune. Weaker demand for cars means bigger discounts from manufacturers and potentially lower profits. GM's earnings may very well decline in the coming years, and the stock price reflects that.
But I think the market is being too pessimistic. GM is a far more efficient company today than it was before the financial crisis. The market is pricing in a steep decline in profits. Anything short of that could send the stock soaring.
Given GM's already low valuation and its 4.5% dividend yield, the stock looks like a solid bet for retirees. The dividend is well covered by earnings, with a payout ratio of less than 25%, so the likelihood of a dividend cut is remote. It looks like there's far more upside than downside to me.
Riding a long-term trend
Cory Renauer (DaVita Inc.): It's fitting that one of the best Buffett stocks for retirees belongs to a company that derives a great deal of its business from retirees. About 39% of U.S. dialysis patients are over 65 years old, and each day about 10,000 baby boomers enter this fast-growing demographic.
Longer life spans and increasingly prevalent chronic conditions that come with age make dialysis treatment a growth industry. Chronic kidney disease now affects about 14% of the general population, and diabetes and high blood pressure are the main cause behind about half of all reported cases.
A growing patient base isn't the only long-term trend providing a tailwind for DaVita and its dialysis-providing peers, as downward-trending mortality rates are lengthening treatment durations across the board. These trends have helped the company report annual revenue growth in each of the past ten years, from $5.3 billion in 2007 to $14.7 billion last year.
Although DaVita doesn't offer a dividend, it has been returning profits to shareholders in the form of stock buybacks that have lowered the number of shares outstanding by about 9.7% over the past two years. With a commitment to increasing shareholder value, and strong tailwinds pushing it forward, this is one Buffett stock retirees will want in their long-term portfolios.
