Warren Buffett, widely regarded as one of the most successful investors ever, has generated market-beating returns over decades for shareholders of Berkshire Hathaway. Since he took the helm in 1965, the shares have enjoyed a compound annual growth rate of 19.8% through 2022, doubling the benchmark S&P 500's 9.9% result.
With those market-crushing returns, it's always worthwhile to look at Berkshire's $360 billion stock portfolio to see which shares the company holds and determine whether any of them might help your portfolio beat the market. So, on that theme, here are two no-brainer Warren Buffett stocks to consider buying right now.
1. American Express
With a stake worth $28.6 billion, American Express (AXP -0.62%) represents 8% of Berkshire Hathaway's portfolio, making the global payments company its third-largest position. Berkshire first acquired American Express stock in 1991 and completed its $1.3 billion purchase in 1995; it has not bought or sold any shares since.
American Express is a longtime dividend-paying stock, first issuing its payout in 1989 and consistently increasing it through the years since. Today, the company pays a quarterly dividend of $0.60 per share, representing an annual yield of 1.3%.
Beyond its total return over the past few decades, American Express excels in one metric Buffett consistently favors: retained earnings. The calculation measures a company's net income or losses and subtracts the total dividends paid.
Management can then use the retained earnings to do any of the following: expand the business, make acquisitions, pay down debt, or repurchase stock.
Over the trailing 12 months, American Express generated $8 billion in net income and paid its shareholders $1.7 billion in dividends, retaining $6.3 billion. With this surplus, it acquired Nipendo, an Israel-based payments company, for an undisclosed amount and repurchased 2% of its own shares.
Over the past three years, management has smartly reduced its net debt (total debt minus cash and cash equivalents) by 91%, from $16.9 billion to $1.4 billion. As a result, it won't be saddled with paying high-interest expenses or relying on expensive debt while interest rates are at elevated levels.
One concern with American Express is that its total provision for credit losses (an expense set aside to allow for uncollected loans and loan payments) is rising as some consumers and commercial clients struggle with higher inflation and interest rates. Specifically, that key performance indicator was at $1.2 billion during the third quarter of 2023, up 58% year over year. Management doesn't seem too concerned, noting how its net write-off and delinquency rates are below pre-pandemic levels, but it's something shareholders should watch closely in the year ahead.
Lastly, regarding valuation, American Express looks like a cheap stock. The company's forward price-to-earnings (P/E) ratio stands at 15.4, significantly lower than competitors Mastercard and Visa at 29.7 and 26.6, respectively. When you consider Amex has nearly tripled the total return of those two over the past three years, the stock looks cheap and is worthy of investors' attention.
AXP PE ratio (forward) data by YCharts.
2. Coca-Cola
Coca-Cola (KO) is Berkshire's longest-held stock and one that Warren Buffett has declared he would never think of selling -- even one share. The beverage maker, founded in 1892, holds elite status as a Dividend King, being an S&P 500 component that has paid and raised its dividend for at least 50 consecutive years.
Coca-Cola recently paid $0.46 per share for its fourth consecutive quarter, meaning shareholders should reasonably expect management to soon raise it for the 62nd consecutive year. As it stands, the current annual yield is 3.1%.
Beyond the iconic brand and dividend history, sales are on the rise again after taking a dip during the pandemic. Digging into the numbers, net operating revenue bottomed out in 2020 at $33 billion after generating $37 billion in 2019.
More recently, Coca-Cola generated $43 billion in 2022, and management guided for 2023 organic revenue (excluding currency fluctuations and recent acquisitions, divestitures, and structural changes) to grow 10% to 11%.
Notably, Coca-Cola has yet to return to its revenue's high-water mark of $48 billion in 2012, which brings us to one of its main risks: consumers' health habits. According to research by independent evaluator Keybridge, calories consumed from soda per person declined 11.8% from 2014 to 2020.
The good news is that the total beverage volume steadily increased by 8.9% from 2014 to 2020, meaning consumers still like buying drinks. As a result, Coca-Cola management has diversified its offerings over the past decade, acquiring the sparkling water Topo Chico for $220 million in 2017 and the sports drink BodyArmor for $5.6 billion in 2021.
Coca-Cola stock currently looks undervalued. It trades at a forward P/E ratio of 21.4, significantly below its five-year trailing average of 27.4.
Image source: The Motley Fool.
Are these Warren Buffett stocks worth buying?
When looking for a new stock to buy, it's easier to overlook some of the best companies in the world in favor of stocks with a lot of hype behind them. These two companies have a long history in the public markets and have consistently delivered solid returns for long-term shareholders, particularly with dividends and share repurchases.
To illustrate, in Warren Buffett's most recent shareholder letter, he wrote how, despite Berkshire not adding to its position in Coca-Cola since 1994, its dividends received grew from $75 million in 1994 to $704 million in 2022.
Similarly, Berkshire hasn't added to its position in American Express since 1995, and its dividends received grew from $41 million to $302 million in 2022. It's important to note that Berkshire's ownership stake has also increased significantly in both stocks due to share repurchases over the years.
For today's prospective buyers, both of these businesses trade at fair valuations and are established market leaders, making them worthy additions to a portfolio, especially for investors seeking dividends.
