Many investors love to follow Berkshire Hathaway Inc. (NYSE:BRK.B) because they are interested in seeing what legendary investor Warren Buffett buys each quarter. After all, if you’re hunting for the next great long-term investment idea, it’s hard to do better than the Oracle of Omaha.
However, it’s equally important to monitor what Berkshire is selling or exiting outright — a red flag for the group of dividend stocks we’ll evaluate today.
Warren Buffett is a long-term buy-and-holder, so we can safely assume that if Berkshire Hathaway is starting to back away, that means Buffett (or his proteges, Ted Weschler and Todd Combs) likely doesn’t believe there’s much value left.
Of the 44 publicly traded stocks that Warren Buffett and Berkshire Hathaway own, 34 of those holdings pay dividends. Thus, being aware of Berkshire’s comings and goings can help income investors reduce risk in their portfolios, weed out potential losers and even avoid dividend cuts.
Today, we’ll look at six dividend stocks that Warren Buffett doesn’t love like he once did. This is a collection of picks that Berkshire has either reduced or exited completely of late, or that Berkshire has held at minimum levels for at least a few quarters.
Dividend Stocks Buffett Doesn’t Love Anymore: IBM (IBM)
Dividend Yield: 4.2%
Berkshire’s Stake in Company: 5.8%
Berkshire Portfolio Value: 4.8%
Warren Buffett began building his stake in International Business Machines Corp. (NYSE:IBM) all the way back in 2011, but he has been selling his position in 2017. Even though IBM remains a meaningful position at around 5% of the portfolio’s total value, that’s less than it was, as Berkshire dumped nearly a third of its stake earlier this year.
What changed?
At Berkshire Hathaway’s annual shareholder meeting in May, Buffett said, “I don’t value IBM the same way that I did six years ago when I started buying. I’ve revalued it somewhat downward … they’ve run into some pretty tough competitors.”
Among those competitors is Amazon.com, Inc. (NASDAQ:AMZN), which has transformed the tech landscape thanks to its fast-growing cloud business.
IBM has suffered a dreadful streak of 21 straight quarters of year-over-year revenue declines. Profit margins also are eroding despite its push into software, service and the cloud. The company’s core businesses are declining faster than expected, and many of its strategic initiatives — think Watson — are taking a long time to gain meaningful, needle-moving traction.
It’s difficult to be comfortable with IBM’s long-term outlook.
Fortunately, IBM’s dividend — which sports one of the highest yields in Buffett’s portfolio — looks very safe. The stock’s expectations are quite low, too, after a nearly 15% decline year-to-date.
If I had to guess, Buffett will hold onto his IBM shares until we see a better price for him to begin legging back out of his position.
Dividend Stocks Buffett Doesn’t Love Anymore: Walmart (WMT)
Dividend Yield: 2.6%
Berkshire’s Stake in Company: 0.05%
Berkshire Portfolio Value: 0.07%
Wal-Mart Stores Inc (NYSE:WMT) has been part of Berkshire Hathaway’s portfolio for more than a decade. However, Buffett began selling off shares at a quick pace in mid-2016, and Walmart now accounts for less than 1% of Berkshire’s portfolio value — down from 2.9% prior to the firm’s first sale in the second quarter of 2016.
It’s no wonder why Buffett initially liked WMT. As the largest retailer in the world, Walmart’s extensive pricing power made it the most affordable place to shop. The business was also very predictable thanks to the non-discretionary nature of its core products; grocery items account for more than half of total sales.
However, Walmart is facing challenges from labor cost inflation and e-commerce competition, which could crimp its long-term earnings growth. Amazon already is taking share from Walmart and pressuring prices across the board. Walmart is responding by pouring billions of dollars into its own digital operations, including a 2016 purchase of Jet.com. The company’s e-commerce growth has boomed since that acquisition, but it’s hard to say how much more payoff these investments will have.
Meanwhile, Amazon is further threatening Walmart’s business, delving further into grocery operations by purchasing Whole Foods Market, Inc. (NASDAQ:WFM).
Walmart still is one of the best companies in the retail industry, but Amazon’s e-commerce operations pose a serious long-term threat to WMT’s market share.
Dividend Stocks Buffett Doesn’t Love Anymore: Johnson & Johnson (JNJ)
Dividend Yield: 2.5%
Berkshire’s Stake in Company: 0.01%
Berkshire Portfolio Value: 0.03%
Johnson & Johnson (NYSE:JNJ) used to be one of Berkshire Hathaway’s largest positions a decade ago, but it only accounts for 0.03% of the portfolio’s value today.
Johnson & Johnson is a dividend king that is a very popular holding in conservative retirement portfolios, so it’s a bit of a head-scratcher why Buffett would decide to dump a business like this. Moreover, Buffett has been reducing his stake in the firm for years, rather than in one fell swoop, making it more difficult to pinpoint why his optimism is waning.
The pharma industry, which generates the majority of J&J’s profits, is facing significant pricing pressures and intensified regulatory scrutiny today, but Johnson & Johnson is nicely diversified by drug and enjoys substantial cash flow from its consumer products and medical devices businesses.
With a pristine balance sheet and excellent free cash flow generation, JNJ stock has a very safe dividend, too.
Perhaps Buffett decided to move on as he saw J&J’s pharmaceuticals business becoming an increasingly important driver of the past decade, and he was less comfortable with the higher risks this segment faces — even if it is nicely diversified like J&J’s.
Dividend Stocks Buffett Doesn’t Love Anymore: Procter & Gamble (PG)
Dividend Yield: 3%
Berkshire’s Stake in Company: 0.01%
Berkshire Portfolio Value: 0.02%
Procter & Gamble Co (NYSE:PG) is a dividend aristocrat that used to make up more than 3% of Berkshire Hathaway’s portfolio. That was until the firm sold 99% of its stake during the first quarter of 2016.
Buffett acquired his position in Procter & Gamble after the firm bought Gillette in 2005, which converted his Gillette ownership into PG shares. Berkshire slowly sold off its stake across the next decade, and announced a deal in late 2014 to purchase Duracell from P&G in exchange for most of his shares.
That deal closed in 2016, which resulted in Buffett’s extremely small remaining stake in P&G.
Duracell actually was part of P&G’s acquisition of Gillette, so Buffett was presumably very familiar and bullish on this company, which enjoys strong market share and brand recognition. Batteries likely will see strong long-term demand as technology needs advance and demand for power sources rises.
Buffett presumably believes the outlook for batteries is better than the outlook for the rest of P&G’s portfolio, which has struggled to achieve solid growth in recent years.
Dividend Stocks Buffett Doesn’t Love Anymore: Verizon (VZ)
Dividend Yield: 4.8%
Berkshire’s Stake in Company: Negligible (sub-0.01%)
Berkshire Portfolio Value: Negligible
Verizon Communications Inc. (NYSE:VZ) is the highest-yielding stock in Warren Buffett’s portfolio, but also the lowest stake … and perhaps for good reason. Many investors began questioning the firm’s dividend safety earlier this year when it reported its first-ever subscriber loss in the first quarter and delivered low free cash flow.
Warren Buffett initiated a position in Verizon back in the first quarter of 2014, but Berkshire Hathaway exited 99% of its shares during the last quarter of 2016. As a result, Verizon accounts for less than 0.01% of Berkshire Hathaway’s portfolio value today.
While telecom has been thought of as a slow-changing cash cow sector, meaningful change has taken place in recent years. Most notably, growth in the wireless market has become increasingly saturated while low-cost rivals’ networks have become much more competitive.
T-Mobile US Inc (NASDAQ:TMUS) in particular has been very aggressive with improving its network and rolling out game-changing marketing plans that have changed the nature of the industry’s pricing plans and contracts.
While Warren Buffett likes capital-intensive businesses with moats, he may believe Verizon’s best days are behind it as competitors close the network quality gap, pursue bundling strategies and fight increasingly harder over existing subscribers.
Dividend Stocks Buffett Doesn’t Love Anymore: General Electric (GE)
Dividend Yield: 3.9%
Berkshire’s Stake in Company: 0% (Exited)
Berkshire Portfolio Value: 0% (Exited)
Warren Buffett completely exited his small stake (0.19% of portfolio value) in General Electric Company (NYSE:GE) during the second quarter of 2017, opting instead to enter former GE financial arm Synchrony Financial (NYSE:SYF).
Buffett’s shares in General Electric were the result of Berkshire’s actions during the financial crisis, when it agreed to buy $3 billion in GE preferred stock that paid a 10% dividend in October 2008. Berkshire exited its warrants five years later, which resulted in the GE shares Buffett recently sold.
General Electric has experienced more than its fair share of challenges over the past few years, most recently reporting disappointing cash flow thanks to the prolonged slump in oil and gas markets, as well as some inefficiencies with its operations.
The company also announced the retirement of CEO Jeff Immelt earlier this year, and the new boss will announce his formal plans for the company in November.
Buffett and Immelt had a close relationship dating back to Berkshire’s initial investment in GE during the financial crisis. It’s hard to say if Buffett decided to move on after Immelt announced his retirement in June or if other factors were at work.
Either way, current dividend investors in GE are betting on the new CEO improving the company’s cash flow profile and extracting more value of the firm’s operations. General Electric continues to vocalize strong support for the dividend during these challenging times, but GE could still turn out to be a value trap.
Time will tell.
As of this writing, Brian Bollinger was long GE, JNJ, PG and VZ.
