|Warren Buffett Says These Are the Best Businesses to Own: 3 Examples from the Berkshire Portfolio|
While we are constantly bombarded with confusing investment gibberish, we must never forget that, for the most part, companies exist for one main reason: to take capital from investors and earn a return. For this reason, it makes sense for investors to look for companies with enduring competitive advantages that are capable of consistently generating high returns on investments.
As Warren Buffett, CEO of Berkshire Hathaway, once said: “The best company to own is one that can deploy large amounts of incremental capital at very high prices with very high rates of return. With that in mind, here are three Berkshire holdings with double-digit returns on invested capital.
With returns on invested capital consistently in the mid-20% range, credit rating leader Moody’s tops our list.
Moody’s shares held up incredibly well during the height of the pandemic and have risen nearly 220% in the last five years, suggesting that it is a recession-resistant business worth betting on.
Specifically, the company’s well-established leadership position in credit ratings, leading to outsized returns on equity, should continue to limit Moody’s long-term downside.
In addition, Moody’s has generated approximately $2.4 billion in free cash flow over the past twelve months. And through the first three quarters of 2021, the company has returned $975 million to shareholders through share buybacks and dividends.
As of the third quarter of 2021, Berkshire owns more than 24.6 million Moody’s shares worth just under $8.8 billion. Moody’s has a dividend yield of 0.7%.
Next up is consumer tech gorilla Apple, which boasts a five-year return on invested capital of 28%, far higher than rivals like Nokia (-3%) and Sony (12%).
Even in the cutthroat world of consumer hardware, the iPhone maker has been able to turn in outsized profits due to its brand loyalty and high switching costs (the iOS experience can only be had through iOS products). Manzana).
And with the company continuing to penetrate emerging markets like India and Mexico, Apple’s long-term growth trajectory remains healthy.
In the most recent quarter, Apple’s revenue increased 29% to $83.4 billion. The company also returned more than $24 billion to shareholders.
The stock currently has a dividend yield of just 0.5%, but with a 3% buyback yield, Apple is doling out more money to shareholders than you might think.
Not surprisingly, Apple is Berkshire’s largest public holding company, holding more than 887 million shares in the tech giant worth roughly $125.5 billion.
Procter & Gamble (PG)
Rounding out the list is consumer staples giant Procter & Gamble, with a solid five-year average return on invested capital of 13.5%.
Berkshire had 315,400 shares at the end of the third quarter, worth about $44 million at current prices. While that’s not a great position by Berkshire’s standards, something makes P&G stand out: the ability to deliver increasing cash returns to investors through thick and thin.
The company offers a portfolio of trusted brands including Bounty paper towels, Crest toothpaste, Gillette razor blades and Tide detergent. These are products that households buy on a regular basis, regardless of how the economy is doing.
In April, P&G’s board of directors announced a 10% increase in quarterly payout, marking the company’s 65th consecutive annual dividend increase.
P&G shares currently offer a 2.2% dividend yield.
Fountain: yahoo news