It's no secret that Warren Buffett has had tremendous success investing in large, well-known companies, many of which appear in the Dow Jones Industrial Average (DJINDICES:^DJI). With earnings season upon us and the Dow in focus, here are Buffett's three largest Dow positions, according to Berkshire Hathaway's (NYSE: BRK-B) latest 13-F filing. Keep in mind that Berkshire does not have to disclose all its stock holdings, so if you're looking for Buffett's entire portfolio, you're out of luck. And while this article should not be taken as a buy list, it is always a useful exercise to consider Buffett's investment decisions.
American Express (NYSE:AXP)
AmEx cardholders have excellent credit, which lowers default risk and raises average spending. The model is similar to Buffett's auto insurance company, GEICO, which targets responsible drivers in order to reduce claims. Way back in 1964, shares of American Express plummeted after the company vouched for a vegetable oil company that took out large loans by falsifying collateral. American Express lost millions, and investors panicked, but Buffett considered it only a temporary setback. Ever greedy when others are fearful, Buffett recognized the long-term prospects of the company and started buying shares.
American Express faces a number of risks and has been trading lower recently after the European Commission proposed a transaction-fee cap of 0.2%, but the company stated during its second-quarter earnings that it did not expect the EC's plans to have a significant impact. In fact, because American Express issues its own cards rather than just serving as a payment processor, its primary business line would not be affected by the caps. Long-term risks include similar efforts to cap charges in the U.S. and the growing awareness of the dangers of high-interest debt. Keeping up with innovations in mobile payments is also crucial to the company's future success.
With roughly 85% of worldwide retail transactions currently conducted using cash or check, there is plenty of opportunity for growth. As consumers and merchants abroad continue to recognize the security and convenience of credit card purchases, American Express and its rivals will compete for market share. Therefore the two biggest areas to watch are international growth and developments in payment technology.
Buffett first bought shares of Coke in 1988. He and his business partner, Charlie Munger, have always appreciated the value of Coke's brand. Coca-Cola has been named the strongest brand in the world, and that brand gives Coke the pricing power that Buffett often cites as his primary reason for buying the stock. Despite its economic moat, Coca-Cola has underperformed the S&P 500 over the last 15 years, so Buffett's outsized gains of over 700% were mostly accomplished in the first decade of ownership.
Coke reported earnings earlier this week, citing weather as part of the reason its revenue missed analyst expectations. But there are greater risks than weather in the company's future, namely the increasing health-consciousness of consumers. And with the majority of Coke's sales being made internationally, weakness abroad hurts the company's bottom line. Market saturation is another concern, but it also speaks to the size and strength of the company's global distribution network. Coke has expanded its offerings to include healthier beverages, and its unmatched ability to distribute worldwide is perhaps its greatest advantage going forward. Investors can also appreciate the company's dividend yield, which is currently around 2.7%.
International Business Machines (NYSE:IBM)
IBM beat second-quarter earnings estimates yesterday but missed on revenue and has lagged the Dow considerably this year. The Dow is a price-weighted index, which means that IBM, at nearly $200 per share, accounts for almost 10% of the index's movements, acting as an anchor when it lags. Buffett began buying shares in 2011, citing strong financial management and impressive future benchmarks. IBM sold its PC business to Lenovo in 2005, exiting the PC and hard disk drive businesses ahead of the recent PC sales slowdown, and has since focused on areas such as business analytics and cloud computing. This about-face in the company's business model lends credence to its reputation as an innovator.
Buffett believes IBM's economic moat lies in its service component, as companies are reluctant to change IT suppliers. Furthermore, as companies around the world look to develop their IT departments, IBM's trusted name makes it a strong candidate.
The company has also engaged in smaller software acquisitions, which, coupled with the firm's strong distribution network, look promising for the firm's bottom line. Taking new software to scale can be tremendously more profitable than hardware, because software's negligible variable cost makes for high margins. Finally, the company has aggressively bought back shares over the past decade. IBM may have lagged the Dow lately, but it appears to be setting the stage for long-term profitability.
Jake Keator has no position in any stocks mentioned. The Motley Fool recommends American Express and Coca-Cola. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.