With Berkshire Hathaway sitting on an all-time record $137 billion in cash, cash equivalents, and marketable securities as of the end of the first quarter, Buffett's company announced a $9.7 billion deal to acquire natural gas transmission and storage assets from Dominion Energy (D -2.74%). The deal values the more than 7,700 miles of interstate pipeline being acquired from Dominion at $4 billion, but also includes about $5.7 billion in debt.
For Buffett, a deal like this makes a lot of sense. It increases Berkshire Hathaway Energy's market share of interstate natural gas transport to 18% from 8%, and it provides Buffett with a veritable cash cow as a middleman in the natural gas industry. For Dominion, it allows the company to focus almost entirely on its utility assets going forward.
The question is, with the Dominion Energy deal now out in the open, what company might be on Buffett's acquisition radar next? While everything that follows is pure speculation on my part, I believe the following two stocks fit the bill for what Buffett is looking for.
It's no secret that Warren Buffett is a fan of cash-cow companies that he can set and forget. That's why utility stocks are often a good bet to be Berkshire Hathaway's next purchase. Though I've previously opined that renewable energy giant NextEra Energy would make for a great fit, it's far too pricey for Berkshire Hathaway at this point in time. That's what makes Michigan-focused electric utility DTE Energy (DTE -2.68%) a logical runner-up to be acquired.
For one, Buffett is a big fan of execution. DTE Energy's management team has continually delivered for shareholders, with a compound annual earnings growth rate of 7.3% between 2008 and 2019, and an average annual dividend growth rate of 6.1% between 2009 and 2020. The expectation through 2024 is 5% to 7% EPS growth, with a targeted payout increase of 7%.
Buffett will also be a fan of the diversity DTE Energy brings to the table. While more than half of DTE's operating income in 2020 will be generated from its highly predictable electric utility operations, the company is also generating fee-based revenue from gas pipelines and storage, as well as its DTE gas utility operations. Further, its Power & Industrial Projects segment aims to utilize renewable natural gas and cogeneration projects to drive a midpoint of $130 million in annual operating profit through 2024. All the while, DTE Energy is lessening its reliance on coal, which'll represent an estimated 45% of energy production in 2023, down from 77% in 2005.
But most importantly, DTE's electric and gas utility segments are regulated. Though this stops the company from outright raising rates anytime it chooses, it also means no exposure to potentially volatile wholesale pricing.
What Buffett would get with DTE Energy is very predictable revenue, cash flow, and earnings growth, with plenty of opportunity on the natural gas and renewables side of the equation for added growth. Considering that DTE Energy is down 17% year-to-date, it looks like the perfect utility stock for the Oracle of Omaha to consider buying.
McCormick & Co.
As some of you may recall, one of Buffett's worst investments to date has been his company's 26.7% stake in Kraft Heinz (KHC -0.63%). Buffett assumed that he was buying into brands that were impenetrable in the consumer-packaged goods (CPG) space, but has watched as organic and smaller players have disrupted a number of Kraft Heinz's core brands. Though Kraft Heinz remains profitable, its earnings growth trajectory has been underwhelming.
Buying McCormick could change Berkshire's fortunes in the CPG space. McCormick has a growing line of top-tier spices and condiments led by brands like Frank's RedHot, French's, Lawry's, and products that bear the McCormick name. McCormick has used this brand recognition to outpace its competitors in the organic growth department, but has also turned to acquisitions to expand its portfolio and boost its growth potential. In 2017, for instance, McCormick acquired Lawry's and Stubb's Bar-B-Q sauce.
Like DTE Energy above, McCormick delivers. This is a company that's produced eight consecutive years of record operating cash flow, has paid a consecutive dividend since 1925, and in November 2019 announced its 34th straight year with a payout increase. This makes McCormick one of a few dozen elite dividend payers known as Dividend Aristocrats.
The best part about the spice and condiment industry is that it's relatively predictable. Higher and lower food costs can typically be seen months in advance, with demand for spices and condiments consistent throughout most economic environments. In fact, it could be argued that the coronavirus disease 2019 pandemic is a net-positive for the company as it'll see more Americans heading back to the kitchen to cook their own meals.
Maybe the biggest issue here is that McCormick has almost done too well for Buffett's liking. When Berkshire Hathaway goes shopping, Buffett prefers that his company nab great companies at a fair price. Unfortunately for Buffett, McCormick's superior execution has the company valued at 32 times estimated earnings for 2020. Even with a long-term sales growth rate of up to 6%, which is far and away tops among spice and condiment providers, this would be a lofty price for Buffett to pay to get his hands on what looks to be a truly impenetrable product portfolio.
Then again, never say never to a company that may still have more than $130 billion in cash on hand.