Warren Buffett is arguably one of the greatest investors of all time.
Under the Oracle of Omaha's executive leadership beginning in 1965, stock for conglomerate Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has averaged a 20% total return each year for the past half-century and counting.
Business partner Charlie Munger helped Buffett come to understand the merits of buying a wonderful company at a fair price instead of simply buying a fair company at a wonderful price. This is something that the Oracle of Omaha discussed in more detail in Berkshire Hathaway's 1989 Annual Letter to Shareholders.
If you want to follow Buffett's highly-regarded investing philosophy with your own stock picks, consider these three high-quality stocks in Berkshire's portfolio that are currently trading at fair or better valuations. They might just be worthy of buying hand over fist in October.
1. Verizon: Generating strong cash flow on the desire for 5G
Large-cap telecom Verizon (NYSE:VZ) currently ranks as the eighth-largest position of Berkshire Hathaway, and those holdings are valued at nearly $8.7 billion. Much of the company's current success can be attributed to its smartphone-related services.
A recent Pew Research survey found that 85% of Americans own a smartphone. Even more mind-boggling is that, according to Statista, the majority of U.S. smartphone owners (57%) spend an average of at least five hours a day on their smartphones aside from work-related smartphone use. Since smartphones are approaching such a high prevalence in American society, Verizon's smartphone-centric business model in many ways functions like a utility, albeit a growing utility.
And Verizon is committed to upgrading its infrastructure from its dominant 4G network to the new and improving 5G network. This should result in continued revenue and earnings stability into the next decade, at least if the decade-plus lifespan of 4G is any indication. This long-term plan is precisely why analysts forecast that Verizon will be able to grow its earnings per share (EPS) by nearly 4% annually over the next five years.
That increasing EPS has also helped Verizon maintain a solid payout ratio (expected to be in the upper-40% range this year) that it uses to fund its enviable dividend. It's reasonable to expect that Verizon should be able to deliver dividend growth in line with its earnings growth going forward. The low payout ratio also means that Verizon's 4.7% dividend yield is safe for income investors looking to buy.
Despite Verizon's steady fundamentals, the stock is trading at a discount right now. Verizon's price-to-earnings (P/E) ratio of 11.3 is well below its 13-year median P/E ratio of 14.7, which should limit downside and also suggests potential valuation multiple upside.
2. Visa: Capitalizing on the growing cashless society
Berkshire's stake in mega-cap payment processing company Visa (NYSE:V) is valued at about $2.2 billion, making it the 18th-biggest holding in Berkshire Hathaway's portfolio.
Unlike American Express and Discover Financial Services, which offer credit to customers and earn interest and fee revenue, Visa and its peer Mastercard focus on building relationships with financial institutions that issue credit and debit cards to customers.
Visa has three primary revenue streams.
- Data processing revenue: Earned when the company authorizes and clears a transaction.
- Service revenue: This involves Visa providing services to support customer usage of Visa products.
- International transaction revenue: Earned when Visa processes cross-border transactions and performs the necessary currency conversion activities to handle the transaction.
Visa capitalizes on a decades-long trend involving the shift from a predominantly cash-based society to a (mostly) cashless society. For instance, a recent survey indicated that 80% of U.S. consumers prefer spending with a debit or credit card over cash.
Fellow Fools Matthew Frankel and Jason Hall recently pointed out that only $45 trillion of the $185 trillion global payments market is via card payments, suggesting that Visa has plenty of room to grow. This untapped market potential and Visa's leading brand recognition is what leads analysts to forecast that Visa will post 20% annual earnings growth over the next five years.
While Visa stock isn't a bargain, trading at 39 times this year's EPS forecast of $5.83, it also isn't exactly expensive when you account for its growth potential. In short, Visa is a wonderful and fairly priced stock with years of strong growth still ahead.
3. U.S. Bancorp
U.S. Bancorp (NYSE:USB) is the sixth-largest holding in Berkshire Hathaway's portfolio, a stake valued at $9 billion. With nearly 2,300 offices and over 4,000 ATMs across 26 states in the U.S., U.S. Bancorp is the fifth-largest bank in the U.S. by assets.
Aside from the usual ways that a bank earns revenue (through lending money out at a higher interest rate than it pays to depositors, by backing credit cards, and through service charges), U.S. Bancorp differentiates itself in a major way. It operates a payments business that offers a variety of services to consumers, merchants, and corporations.
Last year, roughly 25.6% of U.S. Bancorp's net income was derived from its payments business. In its second-quarter 2021 earnings report, management noted that sales volumes for its various payments businesses exceeded pre-pandemic 2019 levels through June and helped its payments revenue rise 17.5% year over year.
U.S. Bancorp's unique revenue mix is why analysts expect the company will generate 13% earnings growth over each of the next five years.
At a current price-to-book ratio of 1.9, U.S. Bancorp's valuation is right in line with its 13-year median price-to-book ratio. The bank also offers a steady dividend, currently generating a 3% yield. This stock offers above-average quality at a fair price.