So you think you know Buffett’s secret investment strategy. What is it? Buffet is a value investor who buys companies at deep value. Ask this question to any investor in financial world and he/she would respond with this answer with a blink of an eye. That’s true and correct. But another significant characteristics of Buffett’s portfolio is dividend growth investing. Not much has been written about this aspect of Buffett’s portfolio. Let us take a little deeper look into Berkshire Hathaway’s (BRK) holdings and analyze them from dividend investing perspective.
As of 4Q 2008, BRK portfolio had a total of 60 companies. The total investments in top ten companies consist of approximately 85% of the portfolio while the remaining 15% is invested in 30 companies. Now, this could be viewed as a “highly concentrated portfolio” or “portfolio anchored to good stocks”. Has Buffett forgotten the meaning of diversification or he just does not believe in diversification per se?. The table below shows the top 10 holdings, their percentage in BRK portfolio, and dividends per share.
We can calculate the annualized total dividend based on share count and dividends per share. It can be observed that from top 10 holdings, BRK receives annualized dividend of USD 1.644 billion (as of end of 2008). It would be safe to assume that since last few years (perhaps 4 to 5 years) BRK’s portfolio companies have been provided dividends in excess of USD 1.0 billion. The other fact is Buffet did not initiate these investments in recent past. However, he may have continued to add to an existing position. We know that he started investing in KO, AXP, PG, WFC, and WSC in late 80s and early 90s. These are the companies that have consistently increased their dividends over the past 15 to 20 years. With those assumptions, we can say that these were Buffett’s investments in dividend growth companies. I would presume that the yield-on-cost for these investments would easily surpass 10 to 15% (depending upon timeline for additional investments).
It seems that Buffett has anchored his portfolio with dividend growth companies which provides consistently increasing cash flow.
So do you still believe Buffett is a value investor? Does Buffett evaluate value using company’s cash flow? What are your observations and thoughts?