Warren Buffett's ability to pick winning stocks for long-term gains makes knowing what stocks he's buying for Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) portfolio worthwhile.
Fortunately, Berkshire Hathaway -- like all big investors -- must file a 13F report with the Securities and Exchange Commission each quarter that shows what Warren Buffett's been up to. The latest report shows he's been picking up shares in dividend companies, including The Bank of New York Mellon Corporation (NYSE: BK), Apple Inc. (NASDAQ: AAPL), and Monsanto (NYSE: MON). Should you follow in his footsteps and add these stocks to your income portfolio, too?
Betting on banks
Warren Buffett has made Berkshire Hathaway a lot of money by investing in bank stocks. Despite struggles at Wells Fargo, his biggest bank position, he isn't shying away from the industry.
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In the fourth quarter, he increased his holdings in Bank of New York Mellon by 21% to 60.8 million shares. The move makes Berkshire Hathaway the bank's second-largest shareholder behind indexing giant Vanguard. Currently, shareholders earn a 1.7% dividend yield, but that's unlikely the reason Warren Buffett is so intrigued by this company.
With roots stretching back to 1784, The Bank of New York Mellon helps businesses, investment managers, and high-net-worth individuals make the most of their assets. Its solutions include investment management, trust and custody, fund administration, securities lending, global payments and cash management, banking, and clearing services. In Q4, fees from those services contributed $2.9 billion to the company's $3.7 billion in revenue.
Its focus on capital markets supports revenue and profit growth because assets under management and demand for its solutions increase as markets respond to global economic growth. As of Dec. 31, The Bank of NY Mellon had $1.9 trillion in assets under management and over $33 trillion in assets under custody or management across 35 countries.
Historically, Buffett has favored companies that are cheap relative to their book value, while banks with a high return on equity are traditionally most intriguing to investors. The Bank of NY Mellon's return on equity has increased to over 11% from under 8% three years ago, and its 1.51 price-to-book ratio is lower than that of other banks in Berkshire Hathaway's portfolio, including Wells Fargo and U.S. Bancorp. Given economic tailwinds and these relatively attractive ratios, it's not surprising that Buffett has made The Bank of New York Mellon Berkshire Hathaway's 10th-largest position.
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Warren Buffett isn't known for his tech savvy (he still uses a flip phone), but that hasn't stopped him from going all in on Apple Inc.
The iPhone and consumer electronics giant first showed up in Berkshire Hathaway's portfolio back in early 2016, when shares were struggling to overcome slowing demand for iPhones in China. At the time, Buffett accurately predicted that the sell-off in Apple's stock was an over-reaction to short-term news and that new products, including the iPhone X, would propel sales and profit higher.
He's been so convinced by Apple's potential that he's added to his position steadily over the past year. In the fourth quarter, he bought 31.2 million shares, bringing Berkshire Hathaway's total position to a staggering 165.4 million shares, worth about $28.5 billion at today's market price.
Apple is now Berkshire Hathaway's biggest stock holding, and there's little evidence to suggest that Buffett's enthusiasm for the company is waning. In the latest quarter, Apple delivered record revenue and profit thanks in part to consumers upgrading to its latest smartphones. The company's products remain deeply embedded with consumers, and that continues to drive demand for profit-friendly services, such as iTunes and apps.
Despite Apple's significant brand recognition, there's still plenty of market share for it to capture. Its phones accounted for only 17.9% of global smartphones sales in the fourth quarter, according to Gartner, and the company's arguably only scratching the surface when it comes to electronic wearables, such as watches. Furthermore, it's only recently rolled out an electronic assistant to compete against Amazon.com (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL).
The company's substantial operating leverage (and effects from the earnings-friendly tax reform) suggest it has plenty of financial firepower to continue rewarding investors with dividend increases. Earnings per share grew 16% year over year, and cash flow from operations was a massive $28.3 billion last quarter. Since Apple returned "only" $14.5 billion to investors via dividends and stock buybacks, it's not a stretch to think this is a savvy stock to add to income portfolios.
Data source: Yahoo! Finance. Chart by author.
Getting in on grains
Buffett has made a large bet on grain and seed giant Monsanto, but he's not alone in thinking Monsanto is worth owning. Global Goliath Bayer AG (NASDAQOTH: BAYRY) has been knee-deep in trying to convince regulators to approve its acquisition of Monsanto since 2016.
It's anyone's guess if they'll succeed in cajoling governments to sign off on the combination, but it appears that either Buffett thinks the deal will happen, or he doesn't care if it happens or not.
Berkshire Hathaway owned 8 million Monsanto shares at the start of 2017, and after adding another 2.8 million shares in the fourth quarter, it's coming into 2018 holding 11.7 million shares. That makes it Monsanto's fourth-largest investor.
Monsanto told investors last month that the deal has secured approval in about half of the countries necessary. An EU decision is expected soon, and if everyone signs off on the merger, management's plan is to close the deal this year. If the acquisition goes through, Buffett will benefit as Monsanto trades at about $120 and Bayer's offer is for $128 per share in cash. If the deal falls apart, Bayer will pay Monsanto a hefty $2 billion for its troubles, potentially creating a win regardless of the outcome.
The uncertainty, however, creates a risk that could outweigh any benefit associated with owning Monsanto for its 1.7% dividend yield. Since there's no way of knowing how this situation will play out, investors interested in adding Monsanto to their income portfolios should approach buying it with their eyes wide open.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Todd Campbell owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.