Warren Buffett is famous for not overpaying for companies, focusing on quality, and holding positions for several years, if not decades. So, it's no wonder why investors look to the holdings of Buffett-led Berkshire Hathaway for dividend stock ideas.
United Parcel Service (UPS 0.02%), Celanese (CE -0.11%), and Chevron (CVX 1.54%) stand out as three quality businesses that have what it takes to grow their earnings and their dividends well into the future. Here's what makes each stock a great buy now.
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UPS stock is an excellent value and has a high yield
Daniel Foelber (UPS): UPS has many of the traits that Buffett dividend stocks share: an industry-leading business with a wide moat, pricing power, phenomenal management, a stable and growing dividend, and an inexpensive valuation. So it's no surprise that Berkshire Hathaway owns UPS stock, even if it is just a small position.
UPS's recent quarterly report was incredibly impressive. The company maintained its full-year 2022 targets of a 13.7% operating margin, a record high $102 billion in revenue, and a return on invested capital above 30%. The performance stands out relative to FedEx, which slashed its guidance as the stock proceeded to suffer the worst single-day decline in company history.
Earlier this year, UPS raised its dividend by 49%. The package delivery giant now has a dividend yield of 3.7%. What's more, UPS stock is trading at a price-to-earnings ratio and a price-to-free-cash-flow ratio well below 10-year median levels -- a sign the stock is a good value now.
UPS PE Ratio data by YCharts
Add it all up, and UPS is a dirt cheap dividend stock that is worth considering now.
Celanese is attractively valued but has near-term risk
Lee Samaha (Celanese): This chemicals and specialty materials company is a quintessential Buffett investment. It's a leading company in an unfashionable industry. Moreover, anyone buying the stock has to take a long-term view because there's a lot of near-term risk around the company's earnings.
Celanese produces engineered polymers used across wide swaths of industries and end markets -- everything from automotive to consumer products, paints, and food and beverage. That's a benefit when the general economy is in growth mode and demand for its polymers is high, but it's a challenge when growth is slowing. Throw in high energy costs as well, and it's clear that Celanese faces a difficult winter. Indeed, Celanese recently received a slew of price target downgrades from Wall Street analysts.
That said, the stock is very cheap based on analyst estimates, even if Wall Street sees earnings declining over the next couple of years. For example, Celanese trades on just 5.5 times estimated 2022 earnings and 6.8 times estimated 2023 earnings. The market's reasoning is probably that no one knows how steep the correction in polymer prices will be, but there's a high degree of certainty that they will decline.
Aside from the valuation, the other key reasons to like the stock are management's initiatives to improve the company's operations. They include rationalizing less productive assets while investing in expanding its low-cost production facilities, such as its Clear Lake plant. In addition, the recent completion of the $11 billion deal to buy DuPont de Nemours' mobility and materials business will hopefully lead to margin expansion and free cash flow growth.
As such, the company's long-term return on assets should improve, even as Celanese works through the up-and-down cycle of polymer prices. The stock is attractive on that basis, but you will need the confidence and patience of Warren Buffett to ride out any potential volatility.
A Buffett stock found in the bargain bin
Scott Levine (Chevron): Investors following Buffett's moves closely are likely familiar with his recent enthusiasm for Occidental Petroleum, leading them to wonder if the energy stock is one that belongs in their own portfolios. One consideration that may affect that decision, though, is the stock's uninspiring 0.7% forward dividend yield. Consequently, those looking for a Buffett-approved energy stock that sports an inexpensive price tag, as well as an alluring dividend, would be well served to consider Chevron, which features a forward dividend yield of 3.1%.
Chevron first appeared in Berkshire Hathaway's portfolio in the third quarter of 2020, and, since that time, the position has grown. In fact, Chevron is now one of the largest positions in the portfolio. As of Sept. 30, Berkshire Hathaway's position totaled nearly 162 million shares and was valued at about $23.4 billion, making it the fourth-largest position at that time.
One of the largest publicly traded oil companies available to investors, Chevron operates an extensive portfolio of upstream, midstream, and downstream assets. This provides investors with exposure to various links in the energy value chain. But Chevron's notoriety transcends its description as an oil supermajor -- it's also a Dividend Aristocrat. For 35 consecutive years, Chevron has raised its payout, demonstrating a steady interest in rewarding shareholders.
It's not only income investors or Buffett aficionados who should find Chevron's stock compelling; bargain hunters will also find it appealing. Currently, shares of Chevron are trading at 11.2 times forward earnings, a steep discount to their five-year average forward earnings multiple of 38.6. Prefer to value the stock using the company's cash flow? No problem -- shares still appear to warrant a place on the discount rack. Priced at 7.6 times operating cash flow, shares of Chevron are currently trading lower than their five-year average cash flow multiple of 9.8.
