Poaching some of Berkshire Hathaway's picks for yourself is a savvy strategy for most investors. But did you know that Warren Buffett and his team can't simply buy a stake in any outfit they like? Between a stock portfolio worth more than $300 billion and a bunch of other privately held companies worth roughly the same amount, some publicly traded companies are too small for Berkshire to bother with; there's also the regulatory hassle of owning more than 5% of a particularly company's shares.
That doesn't mean the Buffett-led conglomerate wouldn't have bought certain small names before Berkshire grew into a behemoth though. One of the tickers he'd very likely have scooped up before he became a multi-billionaire is insurer Lincoln National Corporation (LNC 2.76%). Here's why.
4 for 4
As far as life insurers and retirement plan providers go, Lincoln National isn't exactly a top name. The $8 billion outfit serves 17 million customers, and turned $19.2 billion worth of revenue into net income of $1.4 billion last year. This year's top and bottom lines are tracking at a similar pace, which is respectable but hardly eye-popping.
Don't let its relatively small size fool you, though. Lincoln National sports several of the attributes Buffett appreciates in an investment.
One of those attributes is it's a financial stock -- an insurance company.
While the bulk of the financial stocks found in Berkshire Hathaway's portfolio are from the banking industry, the fund doesn't just hold publicly traded stocks. Auto insurer Geico, United States Liability Insurance Group, biBERK Business Insurance, and Gateway Underwriters Agency are some of the non-public insurance holdings brought into the Berkshire family since its launch as we know it in 1965. As Buffett puts it, "invest in what you know." He clearly knows insurance companies, but more than that, he clearly likes them since he's still holding so many of them!
And it's not tough to figure out why the Oracle of Omaha appreciates the business: It generates relatively predictable cash flow.
That's the second reason Buffett would be a fan of Lincoln now, if Berkshire were a (much) smaller pool of funds. While cash flow from Geico and biBerk is delivered directly to Berkshire's net bottom line, for publicly traded insurers like Lincoln, it comes in the form of dividends. Lincoln has a long history of per-share earnings that more often than not exceed the company's per-share dividend payout. Just prepare yourself for the occasionally alarming quarterly loss if you're going to take the plunge.
LNC EPS Diluted (Quarterly) data by YCharts.
The third reason Warren Buffett likely would have been a fan of Lincoln National Corporation at a different time is related to the second reason: the dividend, and the resulting dividend yield. At its current pace of payout, the stock's dividend yield stands at nearly 4%. Also note the insurer has managed to raise its per-share payout every year since 2010, shortly after the economy began easing its way out of the subprime mortgage meltdown. That's an impressive track record made even more impressive by the fact that Lincoln would nearly qualify as a Dividend Aristocrat, were it not for that relatively short-lived span that up-ended all facets of the global economy.
Finally, there's no denying that with the stock priced at less than 10 times its trailing 12-month profits and less than five times next year's projected profits, Lincoln National checks off Buffett's "value" box.
You should do what Buffett can't
No, it's not using new technologies in a clever way, nor is it working on a breakthrough cure for cancer. Lincoln National is selling insurance, and...well, insurance is kind of boring.
That's largely the point, though. Buffett isn't seeking out stocks for entertainment or as a hobby. He's looking for businesses that will never become obsolete and seeking out companies that should be just as successful 10, 20, even 30 years from now as they are right now. Protection from financial catastrophe is one of those businesses, and this is one of those companies.
Buffett can't add Lincoln to Berkshire Hathaway's holdings. Unless you're a multi-billionaire yourself though, you can step into this healthy, overlooked company without worrying about how much or how little of it you can feasibly own.
