When you need some new stock ideas, you could do a lot worse than scour the holdings of Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%). CEO Warren Buffett has delivered incredible returns for his shareholders. The real secret of his success is not only selecting strong companies to buy, but most importantly, patience through market volatility.
Berkshire has held shares of Coca-Cola (KO 1.50%) for over 30 years, while recent additions like Kroger (KR 0.94%) and T-Mobile (TMUS 0.57%) have delivered attractive returns in recent years. Here's why three Motley Fool contributors believe these are timely stocks to buy this month.
This classic Dividend King is as reliable as ever
Jennifer Saibil (Coca-Cola): Coca-Cola is a ubiquitous brand, and its dominating presence creates a powerful moat that leads to loyalty and increased sales most times. It's one of the main reasons Warren Buffett loves the stock.
Coca-Cola has been facing multiple challenges over the past few years, and though its sales declined dramatically at the beginning of the pandemic, it has restructured and is stronger than ever. Even now in the face of inflation, it's still posting competitive performance so far. Sales increased 5% year over year in the 2023 first quarter, and although operating income decreased 1% from last year, earnings per share increased 12% to $0.72.
Another thing Buffett loves in a stock is a dividend, and it's an area where Coca-Cola shines. It's a Dividend King, which means it has raised its payout annually for at least 50 years.
In this case, it's 61 consecutive years, and that includes straight through the pandemic declines, when its payout ratio reached above 100%. That means it was paying out more in dividends than it was making in profits, but management wanted to confirm that it was committed to the dividend under any circumstances.
KO payout ratio data by YCharts.
The dividend yields 2.8% at the current price. That's high compared to the S&P 500 average of 1.7%, and it usually hovers around 3%. It's slightly lower than usual because its stock performance has been so strong, and yield is inversely correlated with stock price. The flight to safety beginning last year prompted by economic flux sent investors toward secure stocks like Coca-Cola.
The company has demonstrated that its dividend is rock solid, and it's likely to bring investors quarterly income for as long as it's in business, with a high yield to boot.
A well-managed grocery business
John Ballard (Kroger): Kroger has had a great run over the last five years. The stock returned 95% on top of strong financial results through the pandemic, yet the shares still trade at an attractive valuation.
Berkshire Hathaway first reported a position in the grocery chain in the fourth quarter of 2019. Given the relatively small position of 50 million shares, which were valued at $2.47 billion in the first quarter, the stock was likely bought by one of Buffett's lieutenants, Todd Combs or Ted Weschler.
Kroger has the hallmarks of a solid investment. It has a wide store footprint of supermarkets spanning 35 states. The business generated $148 billion in revenue last year, up 50% over the last decade.
Data by YCharts. TTM = trailing 12 months.
The reason to like a large grocery brand as a long-term investment is that it keeps a very loyal customer base within a certain geographic radius around each store. People are generally not going to travel miles across town to shop somewhere else. This explains why Kroger generates very consistent sales every year that gradually increase over time.
Still, there are a lot of grocery stores out there. What makes Kroger stand out is an excellent management team that seems to understand the importance of capital allocation as a means of driving shareholder returns. This is apparent in the company's recent performance. Adjusted earnings per share grew 15% in fiscal 2022, which was much faster than the company's growth in same-store sales (excluding fuel) of 5.6%.
Clearly, management is continuing to improve supply chain efficiency and allocate resources to the areas within the business that generate the best return on capital.
One catalyst to watch on the horizon is the anticipated merger between Kroger and Albertsons. The merger, which is expected to close in early 2024, is meeting resistance on concerns it would lead to less competition. But if it goes through, it would put Kroger in more direct competition with larger stores while accelerating the company's growth.
With the stock trading at a cheap price-to-earnings ratio of 11 and paying an attractive dividend yield of 2.11%, Kroger should be a rewarding investment.
A best-in-class telecom
Jeremy Bowman (T-Mobile): T-Mobile has been a top performer over the last decade. And while the stock's gains have slowed down since Warren Buffett's Berkshire Hathaway first began buying it in 2020, it still looks poised to outperform and gain market share in the massive telecom industry, especially as rivals AT&T and Verizon have floundered.
The company has gained market share with a combination of aggressive pricing, heavy investments in 5G, infrastructure expansion, a focus on customer satisfaction, and clever marketing tactics, especially under former CEO John Legere. T-Mobile continues to earn top marks for internet speed.
The company also delivered solid results in its first-quarter earnings report, adding an industry-best net of 1.3 million monthly billed customers, more than AT&T and Verizon combined, and 538,000 net monthly billed phone customers, adding market share.
In a challenging environment, it grew service revenue by 3% to $15.5 billion. Profits continued to improve as well, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) up 9% to $7.1 billion and adjusted free cash flow increasing 46% to $2.4 billion.
From an investment perspective, the company seems to have another advantage over AT&T and Verizon. Unlike those two companies, T-Mobile doesn't pay a dividend, giving it more freedom to reinvest its profits as it sees fit. While T-Mobile did spend more than $4 billion on share buybacks in its most recent quarter, share repurchases tend to be more flexible than dividends, and the stock's value isn't tied to its dividend payout the way AT&T's and Verizon's is.
Looking ahead, T-Mobile looks well positioned to continue gaining market share and should see profit growth reaccelerate when the economy starts to rebound.
