Warren Buffett's Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) trounced the S&P 500 by more than a 22 percentage-point margin in 2022 -- marking Berkshire's best performance relative to the market since 2007.
Luckily for investors, the contents of Berkshire's equity portfolio are public information. But that doesn't mean that you should copy Buffett's holdings exactly.
Today, Apple (AAPL 0.64%), Celanese (CE 0.72%), and United Parcel Service (UPS 2.42%) are three Buffett dividend stocks that stand out more than the rest of the pack. Here's why.
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Apple stock is a great value
Daniel Foelber (Apple): Even after falling more than 25% from its all-time high, Apple remains Berkshire Hathaway's largest holding -- by far. It makes up 37% of Berkshire's public equity holdings. But Berkshire didn't buy the position all at once. In fact, it has been adding to the position regularly since 2016.
That year, Apple resembled a classic value stock with a powerful brand and a bargain-bin price-to-earnings (P/E) ratio of less than 12. Today, Apple is much more expensive than it used to be -- with a P/E of around 22. But it trades at only a slight premium to the S&P 500's multiple of 19. And there's every reason to believe Apple deserves a premium valuation now more than ever.
AAPL PE Ratio data by YCharts
Apple's bread and butter is still iPhone and Mac sales. But it has successfully expanded the depth and breadth of its product and services offering to create an integrated ecosystem and recurring revenue streams. So far, Apple has mostly stuck to consumer electronics. But the rise of Apple Pay, Apple Card, and Apple Music adds another layer of stickiness for Apple customers.
Perhaps the most impressive quality of Apple is its operating margin and free cash flow (FCF) yield. The company sports an operating margin of more than 30%, meaning it pockets 30 cents on the dollar in operating income. That is borderline unheard of in the consumer electronics industry. And it's a testament to Apple's ability to sell a growing list of premium-priced products and services to its loyal customer base.
FCF yield is a great way to determine how much extra cash a company has at its disposal for dividends, buybacks, and other use cases. Apple's FCF yield of 5.1% means the company could theoretically pay a 5.1% dividend yield entirely with FCF, or buy back 5.1% of its own stock per year with cash. That's a big advantage, because it allows Apple to either use that cash to reinvest in the business or step in and buy its own stock if it is depressed.
All told, a 22 P/E ratio when the S&P 500's P/E ratio is 19 seems like a great deal given how powerful Apple's fundamentals are.
Investing like Warren Buffett requires patience
Lee Samaha (Celanese): The chemical and specialty materials company is going through a difficult period. That includes a cyclical slowdown in the global economy, notably in Europe where the December S&P Purchasing Managers' Index showed chemicals output and new orders declining sharply.
Given the cyclical exposure of Celanese's polymers and materials -- which are used across the economy, from automotives to industrial and consumer products, and electronics -- its sales are likely to come under pressure, not least from declining polymer prices. Meanwhile, the company will be busy integrating its $11 billion purchase of the majority of DuPont's former mobility and materials segment, a business that's underperforming Celanese's management expectations.
I've addressed the near-term negatives first to illustrate why the stock trades at just seven times 2022 earnings expectations and just over eight times 2023 earnings. However, if you can tolerate the potential for near-term lousy news and focus on the long-term picture, the stock, which has declined nearly 37% over the past year, is a good option.
Plus, the acquisition will add geographic reach to its engineered materials segment and expand Celanese's leadership in new categories, while management is aiming for $500 million in run-rate synergies -- around 4.1% of estimated 2023 revenue -- within four years of the closing of the deal.
It all adds up to a company trading at a valuation cheap enough to offset near-term risk but with good long-term opportunities to improve underlying return on assets --a typical Buffett-like investment.
Big Brown can deliver big passive income
Scott Levine (UPS): It may be one of the smallest positions in Berkshire Hathaway's portfolio, currently worth about $10 million, but that shouldn't preclude investors who want the reassurance of Buffett-approved dividend payers from picking up shares of UPS and its forward dividend yield of 3.4%.
While there are numerous companies that have been paying a dividend to shareholders longer than the 23 years that UPS has, it's important to recognize that UPS only held its initial public offering in 1999. In other words, since its debut on the public markets, UPS has rewarded shareholders with a dividend -- one that's never been reduced from one year to the next.
Over the past year, shares of UPS have dropped about 12%, representing a decline consistent with the S&P 500's fall of about 14%.
Inauspicious as it may seem, the stock's fall doesn't reflect something inherently wrong with the company's performance. Instead, the stock's poor performance stems from investors' concerns that an economic downturn could reduce demand for the company's services. Forward-looking investors, consequently, have the opportunity to grab shares of UPS on the cheap. The stock is currently trading at just under 11 times operating cash flow, representing a discount to its five-year average multiple of 14.
Averaging a payout ratio of 68% over the past five years, UPS is taking a relatively conservative approach to rewarding shareholders. More than that, though, a quick look at the company's impressive free cash flow generation shows that the cash allotted for shareholders isn't jeopardizing the company's financial health.
UPS Total Dividends Paid (Annual) data by YCharts.
Despite inflationary pressure and other headwinds, UPS still foresees ample free cash flow in 2022 -- about $9 billion.
