Berkshire Hathaway's (BRK.A 0.40%)(BRK.B 0.60%) chairman and chief executive officer, Warren Buffett, is one of the greatest investors around. His investing acumen has helped the "Oracle of Omaha" consistently rank among the richest people in the world. Because Buffett has such a great track record of picking quality stocks, it would seem prudent for some investors to consider whether Berkshire's holdings could be a good fit for their portfolio.
Let's take a closer look at three Buffett-backed stocks that are underrated at the moment but might just be savvy purchases for your dividend-growth-focused portfolio.
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1. Visa
Berkshire Hathaway has a $1.7 billion stake in payments processor Visa (V 1.40%) and the holding is the 21st-largest in Berkshire's $341.2 billion investment portfolio. Why is Visa among Berkshire Hathaway's holdings?
NYSE: V
Key Data Points
First, Visa has significant competitive advantages over its peers. This is because Visa's trailing-12-month gross dollar volume of $16.3 trillion nearly doubles Mastercard's (MA 1.52%) $8.2 trillion in payment volumes processed. That positions Visa as the more dominant company in the global payments processing industry duopoly.
There's a saying in business that size matters and the payments industry is no exception. This is because more cards in circulation and higher payments processing volume inspires more card issuers to trust and choose Visa as their payment processor. And as more card issuers pick the company as their payment processor, more merchants around the world will respond by accepting Visa as a payment method at their places of business.
Second, consulting firm Boston Consulting Group forecasts the global payments industry will soar from $1.5 trillion in 2021 to just under $3 trillion by 2030. As more consumers turn to the convenience of e-commerce to meet their demands, the adoption of credit cards to provide multiple payment options for e-commerce is surging. Because of Visa's leadership in the industry, it's reasonable to infer that it will capture a large share of that growth over the next several years.
These two factors are factors in why analysts forecast that Visa will generate 16.8% compound annual earnings growth over the next five years.
Much of that extra earnings go straight to the bottom line and get distributed through share buybacks and as dividends. Visa's dividend yield is a low 0.86%, but that is actually sitting at the high end of Visa's 10-year yield average. Part of the reason for the low yield is the strong price appreciation Visa stock has seen over that time (the price is up 484% over the past decade compared to 188% for the S&P 500). With the dividend payout ratio set to come in below 22% this fiscal year, there is plenty of room for future dividend growth. And at a forward price-to-earnings (P/E) ratio of 24.9, shares of Visa are sensibly valued at the current $209 share price. That is what makes it an underrated Buffett stock to buy hand over fist.
2. Procter & Gamble
Berkshire Hathaway's position in the consumer staple giant Procter & Gamble (PG +1.13%) is one of its smallest, valued at less than $45 million. But don't let that fool you: P&G is a world-class business.
NYSE: PG
Key Data Points
The company's portfolio consists of numerous billion-dollar brands. These include the Crest and Oral-B oral hygiene brands, Luvs and Pampers baby wipes and diapers, Bounty paper towels, and Puffs tissues, to name just a few. Given the essential nature of these products, P&G is unsurprisingly a reliably growing business.
That is because its brands have pricing power. And with the global population projected to grow from 8 billion currently to 9.7 billion by 2050, demand for P&G's products should only rise from here on out. This explains how analysts are anticipating nearly 5% annual earnings growth through the next five years.
That earnings growth allows P&G to generate consistent earnings which it uses to pay out consistent (and growing) dividends to shareholders. Along with a dividend payout ratio of 60.6% in its previous fiscal year, P&G has the flexibility to build on the 66-year dividend growth streak that makes it a Dividend King. Income investors can scoop up shares of P&G and its market-beating 2.6% dividend yield (the S&P 500 index's average yield is just 1.6%) at a rational valuation as well. The stock's forward P/E ratio of 24.4 is moderately above the S&P 500 consumer staple sector average of 19.9. But P&G's premium is arguably well deserved in light of its stacked product portfolio and Dividend King status.
3. McKesson
Berkshire Hathaway's stake in the medical supplies and pharmaceutical distribution company McKesson (MCK 0.85%) is worth $1.2 billion, making it the 26th-biggest position in the holding company's portfolio.
NYSE: MCK
Key Data Points
There's a lot to like about McKesson. The company is at the forefront of distributing pharmaceuticals and COVID-19 vaccines over the duration of the pandemic. With operations in 11 countries throughout Western Europe, the U.S., and Canada, McKesson benefits from the increasing need for pharmaceuticals (especially as the population in many of the countries it operates in continues to age).
The average global life expectancy is expected to increase from 71.7 years in 2022 to 77.2 years by 2050. Older patients often require more medicines and medical supplies, and that could help drive demand higher for McKesson's services. It's also part of why analysts forecast the company will deliver 10.5% annual earnings growth over the next five years.
McKesson's dividend yield is an underwhelming 0.6%. Part of the reason for that relates to the strong price appreciation of the stock over the past decade (it's up roughly 300% in the past decade). But for investors willing to look past the low starting yield, there should be tons of potential for future dividend growth. This is because the stock's dividend payout ratio will be roughly 8% for its current fiscal year.
At a forward P/E ratio of 14.7, McKesson stock is slightly discounted compared to the S&P 500 healthcare sector's average forward P/E ratio of 16.4. This makes McKesson an interesting Buffett-owned pick for investors to consider adding to their portfolios.
