Warren Buffett isn’t a dividend investor. The Berkshire Hathaway CEO prefers companies that retain their earnings and reinvest them internally.
Despite this, there are a couple of stocks in the Berkshire Hathaway stock portfolio that have eye-catching dividend yields. And I think that both are good shares to buy at today’s prices.
Kraft Heinz
Kraft Heinz (NYSE:KHC) is the seventh-largest holding in Berkshire’s portfolio. At today’s prices, it has a dividend yield of just over 4%
The company’s main competitive advantage is the strength of its brands. These allow the business to maintain stronger operating margins.
Since 2018, Kraft Heinz has consistently maintained operating margins just above 20%. This compares favourably with Unilever (18%) and Kellogg Company (18%).
To my mind, the biggest risk with the shares is consumers switch to newer and fresher alternatives. There was something of a trend towards this before the start of the pandemic.
It’s also worth noting that the company has a patchy dividend record, which has stayed at $1.60 per share since it was cut in 2019. But I think there’s room for optimism here.
At the time, Buffett said that improving its balance sheet should be the priority for Kraft Heinz. Since then, long-term debt has come down by 25%, leaving the company in much better financial shape.
As a result, I’m expecting better shareholder returns in future, either by higher dividends or by share buybacks. And a 4% dividend now while I wait puts Kraft Heinz shares on my buy list.
Citigroup
In some ways, Citigroup (NYSE:C) is similar to Kraft Heinz, despite its business operating in a very different sector. The firm is in the process of executing a turnaround that I think will leave it in a better place going forward.
At today’s prices, the stock has a dividend yield a little above 4%. And (like Kraft Heinz) the dividend has been at that level since 2019.
Citigroup is currently in the process of restructuring. It’s selling off some of its international consumer operations to leave a global commercial bank and a US retail bank.
Over time, this should make the company more efficient and allow it to earn better returns on its capital. But restructuring stories are always risky and this one is no exception.
The biggest risk comes from its expenses. Restructuring will incur big costs and maintaining its global corporate business is likely to prove expensive over time.
Despite this, I think the shares are a bargain. The current price values the entire company at around $97bn, but the value of the company’s assets after subtracting its liabilities is around twice this.
That means Citigroup’s stock trades at a price-to-book (P/B) ratio of around 0.5, which is substantially cheaper than its peers. Bank of America trades at a P/B ratio of 1.2 and JP Morgan trades at (1.6).
It’s also worth noting that Citigroup has been buying back its shares since 2019, reducing the outstanding count by 12%.
This makes the dividend incrementally more affordable for the company. Paying out $2.04 per share is less expensive with 1.99bn shares than it is with 2.27bn.
I see Citigroup as a business with significant potential with a good dividend right now. The stock is the 14th-largest holding in the Berkshire portfolio and I’m buying it as well.
