A look across the trades made by Warren Buffett's Berkshire Hathaway in the first quarter reveals an addition to its stake in Apple (AAPL -0.35%) and a new position in small-cap oil and gas company Vitesse Energy (VTS 0.75%). Both are interesting stocks for investors looking for long-term passive income.
Berkshire Hathaway's bullish move on Apple
Now, I know what you are thinking, and you have a point. Apple's 0.6% dividend yield isn't the first thing an income-seeking investor will consider. But the stock is a genuine candidate here for three reasons:
- Apple has more than doubled its dividend per share over the last decade, and, quite often, long-term investors' highest-yielding stocks are not those bought with a high yield to start with.
- Apple's earnings and free cash flow (FCF) could easily support a higher payout, and as companies mature, they tend to focus more on dividends.
- The company has a substantive opportunity to improve its FCF from the growth of higher-margin services.
The graph below shows those first two points. It's not hard to see that Apple's dividend, although rising at a compound annual rate of 8.6% over the last decade, is still very well-covered by earnings and FCF. As such, there's plenty of potential to increase cash dividends paid to investors.
Data by YCharts.
The gross margin for Apple's services segment (accounting for around 22% of sales in the recently reported quarter) is almost double that of its product segment's gross margin. Moreover, its services revenue (built on the strength of an installed base of more than 2 billion active devices) has plenty of growth potential.
It also tends to be revenue that's recurring. For example, AppleCare, digital subscription services, payment, and cloud services offer long-term growth, which should improve Apple's margin profile, cash flow, and ability to increase its dividend.
Berkshire Hathaway's latest investment: A high-yield stock
The 51,026 shares that Berkshire Hathaway acquired in Vitesse Energy in the first quarter are now worth around $1.1 million. It's hardly an acquisition likely to move the needle on Berkshire Hathaway's performance. Moreover, the company's $609 million market cap means it's not likely to be a stock heavily bought by institutions. It's not easy to pick up a sizable amount in such stocks.
That said, now is a great opportunity for retail investors to follow Buffett into an oil and gas stock. Vitesse is different from most of the sector in that it's a "non-operated working and mineral interest owner of oil and gas assets primarily in the Bakken oil field in North Dakota," according to the company.
In other words, instead of owning and operating oil and gas assets, Vitesse's management buys minority interests in myriad oil and gas assets and partners with well-established operators -- including Chord Energy, Hess, and, to a lesser extent, EOG, ConocoPhillips, ExxonMobil, and Marathon Oil.
As such, Vitesse avoids many of the costs associated with being an owner/operator of assets, including drilling obligations and upfront leasing and infrastructure costs, while retaining the financial flexibility to allocate capital toward opportunities that generate the highest return on investments. It's an approach that leverages the expertise of its management, including industry veteran CEO Bob Gerrity.
The potential upside to the stock comes from a combination of higher oil prices/production by its partners and, equally important, ongoing success in allocating capital to productive investments. Management tries to limit the downside by maintaining a conservative debt-to-earnings ratio (something that helps in a downturn because the company can be opportunistic with acquisitions) and hedging oil production.
While hedging the volatility in oil price movements is always an inexact science, the fact that management does it emphasizes that a lot of the value in the stock, comes from management's expertise in buying assets rather than over-reliance on a rising price of oil. That's what investors are relying on to let the company, at the least, maintain its dividend payout, currently yielding more than 9%.
