Warren Buffett's perseverance and patience can be a breath of fresh air during times of intense market volatility. The objective is simple yet effective: Buy quality businesses at good prices that have long-term value. It's no wonder that some of Buffett's largest holdings include industry-leading companies like Apple and Coca-Cola.
United Parcel Service (UPS 0.02%), Waste Management (WM 0.97%), and Air Products and Chemicals (APD -0.59%) are three Warren Buffett-type dividend stocks that could be great buys for investors looking for businesses they can count on for decades to come.
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This package delivery giant could positively surprise investors in 2022
Lee Samaha (UPS): Warren Buffett's Berkshire Hathaway only holds a small position in UPS, just $11 million worth of stock. However, events in 2022 might encourage him to buy more UPS stock throughout the year.
The case for buying the transportation stock rests on the idea that UPS will, at the very least, achieve its 2023 targets. Management laid out the plans on its investor day presentation in July. The targets include increasing revenue from $84.6 billion in 2020 to a range of $98 billion to $102 billion in 2023 and expanding profit margin from 12.7% to 13.7% in 2023. As a result, adjusted operating profit is forecast to increase to between $12.4 billion and $14 billion in 2023 compared to $8.7 billion in 2020.
The catalysts for the improvement come from an increase in international segment revenue and a combination of revenue growth and substantive margin expansion in the U.S. domestic package segment to a range of 10.5% to 12% in 2023.
But here's the thing: Management is already forecasting that the U.S. domestic package margin will reach 10.5% in 2021, so UPS is on an excellent track. Moreover, many of its key transformational initiatives, such as expanding in the small and medium-sized business (SMB) and healthcare markets, really hit home during the pandemic. SMB customers rushed to build out e-commerce capability during the pandemic, and the importance of timely deliveries in the healthcare industry is obvious.
In a nutshell, it appears that CEO Carol Tomé's emphasis on a "better, not bigger" framework is working, and UPS is expanding margin and growing volume instead of mainly focusing on chasing volume growth.
Cautious investors may want to wait until the company reports on trading over the Christmas period, but assuming it went as planned, there's every potential that UPS could upgrade its 2023 targets this year.
A quality dividend stock that rakes in a ton of cash
Daniel Foelber (Waste Management): I couldn't agree more with Lee that UPS is arguably the best all-around stock that Buffett owns. Another industrial that could be right up Berkshire's alley is Waste Management -- the largest integrated waste collection, transportation, disposal, and recycling company in North America.
Waste Management has a diversified set of public and private residential, commercial, and industrial customers. It generates stable and predictable free cash flow (FCF) no matter the economic cycle because people don't stop creating trash during tough times.
This dynamic was put on display in 2020 when Waste Management's operating revenue fell just 2% compared to 2019 and its FCF (excluding proceeds from divestitures and other assets) was down 16%. Waste Management's long-term contracts help protect it from weak performance even when its industrial and commercial customers are producing less waste during slower business cycles. FCF didn't stay down for long, as Waste Management earned more FCF in the first three quarters of 2021 than in any full year in its history.
Strong FCF supports Waste Management's share buybacks and dividends. With a 1.7% dividend yield and a stable business, Waste Management has the type of moat that Buffett tends to look for.
A stock with which Buffett could gas up his portfolio
Scott Levine (Air Products and Chemicals): Whether you're taking your first steps on your investing journey or you're already miles into it, following in the Oracle of Omaha's footsteps is always a prudent course of action to take. Naturally, there are many considerations that Buffett weighs before buying a stock, but we can take some of his basic principles to guide our own stock picking. And in doing so, it's apparent that Air Products and Chemicals, a supplier of industrial gases, is a stock that bears many hallmarks of his favorite tickers. On its most superficial level, it's a business that is easy to understand: selling gases and providing related services to other businesses. And easy-to-understand businesses are at the core of Warren Buffett's holdings.
Another of the most familiar characteristics of Buffett's investments is that they are well-run companies -- a characteristic clearly found in Air Products. Management has consistently and deftly handled the company's finances while also rewarding shareholders. For nearly 40 years, Air Products has provided investors with annual raises to the dividend, resulting in the company achieving Dividend Aristocrat status. The company's impressively consistent dividend hikes, however, aren't the only indication of management's prowess; it's also illustrated by an insightful metric: the return on equity (ROE).
Summing up his preference for the yardstick, Warren Buffett once advised investors, "Focus on return on equity, not on earnings per share." For Air Products, the C-suite's consistent success is apparent. Over the past 10 years, Air Products has averaged an ROE of 17.2%.
For those who are intrigued with Air Products and have checked the price tag, the stock's valuation may seem undesirable since it's trading at 32.3 times trailing earnings, a premium to its five-year average multiple of 28.4. Again, though, Buffett's advice bears repeating: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." For this reason, today seems as good as any to add Air Products to your portfolio.
