Investors follow what stocks Warren Buffett's Berkshire Hathaway picks for a simple reason. Since Buffett took over the company in the 1960s, it has become the largest financial stock in the U.S. market and has delivered a five-year return of 79% and a 10-year return of 202% versus 60% and 173%, respectively, for the S&P 500 index.
The best way to see which stocks Berkshire Hathaway is buying or selling is by following the company's 13F reports with the Securities and Exchange Commission. Buffett isn't heavily invested in healthcare stocks, but he's an investor in McKesson (MCK 0.62%) and Johnson & Johnson (JNJ -0.46%), which says a lot for these two multinational companies.
Why McKesson is a good long-term stock
Berkshire Hathaway recently trimmed its position by more than 19% in McKesson but still owns nearly 2.3 million shares of the pharmaceutical distribution company.
McKesson's shares are up a little more than 11% so far this year, but it is hardly expensive, trading at just over 16 times earnings. It is the type of company that Buffett likes -- boringly dependable. The company has relatively tight margins, but has managed to increase annual revenue for 10 consecutive years. Over that period, the stock has risen 262%. McKesson has a pretty big moat as it distributes one-third of all pharmaceuticals used in the U.S.
McKesson has made a point of increasing its oncology and biopharma products and services, and those moves are paying off. In fiscal 2023, the company reported revenue of $276.7 billion, up 5%, and adjusted earnings per share (EPS) of $25.94, up 245%. It is predicting adjusted EPS of between $26.10 and $26.90 and for revenue to climb somewhere between 4% and 9%.
The company operates in five segments, but the fastest-growing one is prescription technology solutions, which saw sales increase 14% in fiscal 2023 and is expected to grow between 11% and 15% in 2024. That's thanks to the growth in McKesson's prescription volumes in its third-party logistics business and higher technology service revenue.
The last thing that makes McKesson a solid long-term hold is its dividend. While the yield is an unimpressive 0.52%, the company has increased the dividend for 15 consecutive years, including a 14.8% bump in 2022 to $0.54 per share. With a payout ratio of slightly more than 8%, there's plenty of room for continued raises.
Why Johnson & Johnson is a good long-term stock
Berkshire only owns 367,000 shares of Johnson & Johnson, but it fits in with the rest of the company's value-oriented portfolio. Johnson & Johnson is a huge healthcare conglomerate with more than 150,000 employees and has increased its revenue for seven consecutive years. This year, the company said it expects annual revenue between $96.9 billion and $97.9 billion, a rise of 4.5% to 5.5% over 2022.
The company's spinoff in May of its consumer healthcare division into an independent company, Kenvue, should increase margins for Johnson & Johnson as it can now focus on its pharmaceutical and medtech segments that are expecting more growth. The company's products are largely recession-proof and the stock is seen as a safe harbor during economic downturns because of its financial power.
In the first quarter, its pharmaceutical segment did $13.2 billion in revenue, up 4%. The company's top-selling drug in the first quarter was immunosuppressant Stelara, with $2.4 billion in sales, followed by monoclonal antibody cancer therapy Darzalex, with $2.3 billion in sales. The top sellers aren't what's most impressive, though; rather, it's the depth of the company's pharmaceutical products.
Johnson & Johnson spent $14.6 billion last year on research and development. That's a stunning figure, more than many pharmaceutical companies earn annually in revenue. In return, Johnson & Johnson has a portfolio that includes 13 therapies that could bring in $1 billion or more this year in revenue.
It is also more than willing to bolster its bottom line with acquisitions, the biggest of which was its $16.6 billion purchase of heart-pump maker Abiomed late last year. In its latest reporting period, the second quarter of fiscal 2023, Abiomed had revenue of $266 million, an increase of 11% and its seventh consecutive quarter of double-digit growth. Johnson & Johnson, in its first-quarter report, said medtech revenue had climbed 11%, with Abiomed contributing 4.6% of that growth.
The company has had to deal with plenty of negative press in recent years. It is paying $5 billion as part of a $26 billion multi-company opioid lawsuit that settled last year, and, thanks to a proposed $8.9 billion settlement, is closer to putting talc lawsuits behind it. As big as the company is, the settlements won't have a debilitating financial impact and they help the stock to get out from under the cloud of bad news.
Johnson & Johnson's dividend pays an above-average yield of around 2.87%. The company has increased the quarterly dividend for 61 consecutive years, including a 5.3% jump this year to $1.13 per share. The payout ratio is high at 73%, but the company's commitment to the dividend doesn't seem to be wavering.
