Warren Buffett is arguably the most revered investor on the planet. Over the course of more than six decades, he's turned less than $10,000 into a net worth of nearly $79 billion. What's truly amazing is that he's done this simply by buying high-quality companies and sticking with them over the long run. It's a strategy so simple that even retail investors can profit from it.
With this in mind, we asked three of our own Foolish investors what Warren Buffett-type stocks they'd suggest retirees consider buying. After all, seniors today are living considerably longer than they were 50 years ago. The Warren Buffett stocks our investors suggest you look into include Johnson & Johnson (JNJ +0.00%), Sonoco Products (SON +0.57%), and Phillips 66 (PSX 4.13%).
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A true healthcare stalwart
Sean Williams (Johnson & Johnson): Healthcare conglomerate Johnson & Johnson is the epitome of safety and success that retirees should be considering for their portfolios. It's also a stock that Warren Buffett happens to own through Berkshire Hathaway.
Johnson & Johnson's success is a direct result of four factors. First, a vast majority of the company's operations involve inelastic products. People can't control when they get sick or what ailment they develop, meaning there's always a steady stream of demand for J&J's pharmaceuticals, medical devices, and consumer health products, regardless of how well or poorly the U.S. economy is performing.
Secondly, J&J's business structure is set up for success. Rather than being one gigantic entity, J&J is actually comprised of more than 260 subsidiaries. It frequently acquires and divests assets like puzzle pieces to jettison slower-growth assets and replace them with high-growth businesses.
Third, each of J&J's business segments serves a purpose. For instance, its pharmaceutical division provides the rapid growth and high margins that investors today want to see. Medical devices provides a long-tail growth opportunity as the global elderly population grows. Finally, consumer health products provides predicable cash flow and strong pricing power.
Lastly, J&J has an impressive balance sheet and its sports one of only two AAA credit ratings from Standard & Poor's among publicly traded companies. In other words, Standard & Poor's has the utmost confidence that J&J will be able to use its billions in annual cash flow to service its debt, as well as pay a dividend that's been increased in each of the past 55 years.
Stocks don't come more rock-solid in my opinion than Johnson & Johnson, which is why retirees should strongly consider adding it to their portfolio.
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Stock in a box
Rich Smith (Sonoco Products): What should a retiree look for in a stock? How about a company that sells something essential to the modern economy, a tollbooth kind of a business like Warren Buffett prefers? While you're at it, how about a stock that pays an above-market-average dividend yield, to help pay the mortgage on the vacation home?
How about a stock like Sonoco Products?
I've been watching Sonoco Products for a long time, and I like what I see. This maker of cardboard products -- shipping boxes in particular -- seems to me a fine way to play the growing importance of Amazon.com to our economy. Why? Well, to state the obvious, Amazon can ship all the goods it wants, but it can't ship a thing if it doesn't have a box to ship it in. So long as Amazon is growing, I think Sonoco Products' business must grow as well, by providing the boxes that are essential to Amazon's growth.
Yet despite having this tailwind supporting its business, Sonoco stock doesn't carry a big price tag, even as it pays a very big dividend. Sonoco's P/E ratio is a modest 18.3, a 25% discount to the average 24.5 P/E on the S&P 500. Meanwhile, its dividend is 3.2% -- 50% higher than the average on the S&P 500. And with a payout ratio of only 56% (i.e., only 56% of profits go to paying the dividend), Sonoco has plenty of cash coming in to keep its dividend above average for years to come.
That's the kind of business Warren Buffett would love, and the kind of stock retirees should love as well.
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Nothing could be finer than owning this refiner
Sean O'Reilly (Phillips 66): Though not as well known as Buffett holdings American Express and Coca-Cola, Phillips 66 is a Buffett stock retired or retirement-minded investors should get to know. Unlike its exploration and production peers, Phillips functions as a downstream energy company, owning the assets that refine, market, and process petroleum products, as opposed to pumping it out of the ground. Phillips' status as an advanced downstream operator is probably what led Buffett to take a $7.3 billion stake in the firm in the first place. You see, while oil producers are subjected to the whims of crude prices, Phillips makes a profit as more of a manufacturer than a wildcatter. Revenues come from the spread between oil and its derivative products, not from getting lucky on an oil well.
Phillips 66 is one of the best in the business, and it's no simple oil refiner. On top of its 11 oil refineries, Phillips also owns a 50% stake, alongside Chevron, of CPChem, a $13.6 billion chemical manufacturer. This operation, in tandem with Phillips' sizable midstream-asset portfolio, makes for a well-diversified and profitable enterprise.
While its oil-producer cousins have continued to suffer, Phillips continues to mint money. Revenues for the second quarter of fiscal 2017 came in at $20.8 billion, up from $18.34 billion in the same period last year. With Buffett's blessing, a 3.14% dividend yield, and analysts polled by S&P Global Market Intelligence expecting EPS to grow to around $7.00 per share by fiscal 2020 from this year's estimated $4.26, Phillips 66 is a solid Buffett stock for any Foolish investor.
