After a couple years of underperforming the S&P 500, CEO Warren Buffett and Berkshire Hathaway have returned to crushing the market in 2022. The investment conglomerate's value-focused approach to portfolio composition and penchant for identifying sturdy businesses have helped its stock holdings significantly outperform the market at large.
With the market outlook still looking turbulent, the Berkshire portfolio may be a good place to turn to for stock-picking inspiration, and dividend-paying companies in the cohort could be particularly well suited to generate returns in the current climate. Read on to see why a panel of Motley Fool contributors identified Occidental Petroleum (OXY 0.58%), Kraft Heinz (KHC -0.21%), and HP (HPQ -0.11%) as income-generating stocks backed by Buffett to buy this summer.
Image source: The Motley Fool.
From sideshow to a core holding in Berkshire's portfolio
Daniel Foelber (Occidental Petroleum): Occidental Petroleum's (Oxy's) roller-coaster ride from above $80 a share to below $10 a share, to its current price of around $58 in around four years has been chock-full of drama. In the years leading up to the pandemic, Oxy was known as one of the riskier exploration and production companies that didn't mind paying a premium price for onshore acreage. Its goal was to become the dominant producer in the Permian Basin through scale. Oxy achieved that goal by buying Anadarko Petroleum for a premium price, which gave Oxy an elite Permian portfolio in terms of acreage but also left it spread thin due to a highly leveraged balance sheet. That aggressive strategy backfired in 2020 and left Oxy much more vulnerable to the market downturn than integrated majors or even its E&P peers like ConocoPhillips or EOG Resources, which can break even at a lower oil price than Oxy.
However, Warren Buffett-led Berkshire Hathaway saw value in Oxy's depressed stock price and began gobbling up shares under the assumption that Oxy would make out like a bandit if oil and gas prices rose. They did. And today, Oxy is raking in the free cash flow. Despite having more than quintupled in roughly two years, Oxy stock still has a price-to-earnings ratio of 8.7 -- which goes to show how its higher-risk strategy can pay off. Oxy has been using its outsized profits to repurchase shares and pay down debt, which is improving the health of its balance sheet and better positioning it for the next market downturn.
In February, Oxy's board of directors approved a $0.13 per share quarterly dividend -- giving the stock a forward dividend yield of around 0.9%. It may not seem like much, but it wouldn't be surprising if Oxy continued to raise its dividend in the years to come once it feels it has paid off enough debt.
Today, Oxy is now the seventh-largest public equity holding in Berkshire's portfolio. Oxy isn't a very safe oil and gas stock. But for investors who believe oil and gas prices could stay high for years to come due to a limited supply base and declining industry investment, Oxy stands out as a long-term winner.
Not the inflation victim many expected it to be
James Brumley (Kraft Heinz): While most everyone understands that inflation is adversely impacting all companies, there seems to be this general idea that it's toughest on food companies. Not only are these outfits (usually) low-margin operations anyway, but some of their biggest costs -- freight and food ingredients -- are seeing some of the sharpest price hikes.
Largely lost in the mix, however, is how readily most of these companies can pass these costs along to consumers, who have to eat. Take Kraft Heinz for example, my preferred dividend pick. Its first-quarter organic sales grew 6% year over year, while its prices charged to retailers were up 9%. And most of the spread between those two increases is actually attributable to supply chain constraints rather than consumers balking at higher grocery prices.
This dynamic of course means Kraft Heinz's dividend payments are better protected than the market might have presumed a year ago, when inflation started to soar. Then again, there was plenty of cushion anyway. Its first-quarter earnings of $0.60 per share still easily covered the dividend payment of $0.40.
I don't foresee any huge growth for the company's top and bottom lines at any point in the future; it's just not that kind of pick. With the dividend yield at a healthy 4.1%, though, I still view it as one of Buffett's top dividend picks for newcomers.
This stock has a cheap valuation and solid yield
Keith Noonan (HP): Computer and printer hardware maker HP got a big valuation bump in April following news that Berkshire had purchased a roughly 11% stake in the company, but it's since lost ground amid pressures impacting the broader market. The stock now trades down roughly 16% year to date, and investors have an opportunity to buy the stock at levels significantly cheaper than what Buffett got it at.
The growth outlook for the printer segment admittedly isn't inspiring, but the company looks attractively valued, and its computer hardware segment is going through a transition that should better position it for the long term. While much of the business previously revolved around relatively low-cost, mid-range hardware, HP is shifting focus toward high-performance PCs and laptops. It's seeing strong demand from both consumers and businesses in the high-end category, and the transition could substantially improve the company's overall margins.
The dividend profile here also looks pretty good. Recent sell-offs have also pushed the computer hardware company's dividend yield up to roughly 3.2%, and the company has also been increasing its payout at an impressive clip.
HPQ Dividend data by YCharts
HP has been posting consistent profits, and its free cash flow picture has been improving, so it looks well positioned to continue delivering payout growth. While the company will likely face some pressures if economic conditions continue to worsen, its stock currently trades at roughly seven times this year's expected earnings, and that conservative valuation could provide some insulation against continued market volatility.
