Broker forecasts

The research team at Goldman Sachs came out at the start of October to note it still rates Bank of America (NYSE:BAC) as a Strong Buy. This is the highest form of recommendation that analysts can give. At the moment, the team at Goldman Sachs isn’t the only one with such a rating. In fact, of the 24 brokers that cover the stock, 13 have a Strong Buy, two have a Buy and nine have a Hold rating.

The average share price target for the next year for Bank of America shares is $44. Given that it trades at $40 right now, that’s a potential 10% uplift. Of course, share price targets and analysts ratings aren’t always correct. Yet the high proportion of Buy ratings (and the lack of selling ones) does give me the impression that Wall Street has a favourable outlook for the bank.

Buffett first bought Bank of America stock in August 2011, with a $5bn stake alongside warrants that gave him the potential to further increase his exposure over time. Even though he recently trimmed some of his exposure, the latest filings show it’s the third largest holding in his portfolio. The current value of the stock equates to 12% of the overall investment pot.

Taking a closer look

Buffett’s up handsomely on his initial investment. Yet even over just the past year, Bank of America shares have jumped by 54%.

The bank’s benefitted from the US Federal Reserve keeping interest rates higher than many expected, with the first rate cut only coming last month. This has allowed the bank to make a large profit margin in the difference between the rate charged to clients on loans versus what gets paid on deposits.

What impressed me from the latest quarterly results was the growth in non-interest related income. Investment banking fees were up 29% versus the same period last year. Trading revenue also jumped by 9%. This shows the firm has a diversified income base from various angles.

One risk is that the bank’s one of the largest holders of retail deposits in the US. As interest rates start to fall, these funds are likely going to be pulled by customers for use elsewhere. Therefore, the bank will make less money from holding deposits going forward.

I do like the company, as does Buffett and analysts on Wall Street. Therefore, I’m thinking about adding it to my portfolio shortly.

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Lately, I’ve been thinking about how I can learn from the ‘Oracle of Omaha’. Over the years, he’s provided investors with so much great advice. I want to apply it to my investing as I try to beat the market.

But would it just be easier to copy his portfolio? After all, it seems to be working for him. Berkshire Hathaway’s largest two holdings are Apple (NASDAQ: AAPL) and Bank of America (NYSE: BAC). Should I buy them?

A lot to like

Apple makes up a whopping 42.4% of Berkshire’s portfolio while BofA clocks in at 10.2%. To be fair, it’s easy to see why.

What I like about both companies is they align with Buffett’s investing principle of investing in what you know. It’s simple to understand how both generate revenue. They’re quality businesses that have been around for decades.

Buffett also loves making passive income. Apple yields 0.6% while BofA offers 2.7%. They’re not the largest yields out there. However, what they are is sustainable. Apple has paid a dividend since 2012 while BofA has upped its payment for the last 11 consecutive years. Last year, Buffett received over $1.87bn in dividends from just these two stocks.

There are other reasons I can see why he might own them. For example, Apple provides exposure to the artificial intelligence (AI) industry, which has gained incredible traction. The firm is investing heavily in the space, with it reportedly set to spend over $1bn a year.

Turning to BofA, trading on 11 times earnings, I think the stock looks good value for money. While its fourth-quarter results were a mixed bag, there were positives to take away, such as a rise in dealmaking for its investment banking arm.

Not as easy as it looks

But as easy as Buffett makes it look with his eyewatering returns, it’s not all plain sailing.

For example, Apple has got off to a weak start this year following a slowdown in sales from China. To make matters worse, the company has been fined $2bn by the EU related to it limiting competition from music streaming services.

Unlike Apple, BofA stock has performed strongly in 2024. Nevertheless, Buffett has voiced his concerns over US banking regulations. What’s more, a fall in profit and net income in its last update could be a source of concern.

Time to buy?

But Buffett doesn’t stress about short-term volatility. He’s in it for the long run. And so am I.

That said, I’d never blindly follow Buffett’s investments. That doesn’t make sense. We all have different goals and aims when it comes to investing and investors should do their own due diligence. Even so, I think these two stocks could be shrewd buys.

Apple is one of my largest holdings and was one of the first stocks that I purchased. I’m always looking to pick up more shares with any spare cash I have. I also like the look of BofA. If I had the cash, I’d consider buying.

The post Does it make sense to buy Warren Buffett’s largest holdings? appeared first on The Motley Fool UK.

Despite this, I figured there was a better opportunity available. And the stock I’ve been buying just so happens to be another Berkshire investment.

Why sell?

First things first – I can’t see anything wrong with Bank of America shares. But with the stock up 42% since October, I don’t think they offer the same value they once did.

Buffett also pointed out a significant risk with the stock at the last Berkshire Hathaway meeting. Concerns over US banking regulation caused him to sell shares in JP Morgan and other banks.

I held my shares a bit longer, since I thought there were still attractive returns on offer. A 3.6% dividend plus share buybacks averaging 2.6% a year looked attractive to me.

A higher share price changes things somewhat – the dividend yield comes down and share buybacks have less effect. That’s why I decided to sell the stock to buy something else.

What to buy?

I’ve been adding to my stake in Kraft Heinz (NASDAQ:KHC) with some of the cash I generated from the BofA sale. The stock is down 10% over the last 12 months and I think I see an opportunity.

My investment thesis for the company has been the same for a while. I’m not expecting significant revenue growth from the business, but I think it can improve profitability by reducing its debt. 

So far, that thesis seems to be playing out. Back in November, the firm announced it had met its balance sheet targets and was therefore going to spend $3bn on share buybacks by the end of 2026.

At today’s prices, that’s about a 7% return – or 2.4% a year. By itself, that’s not eye-catching, but adding it to a dividend currently yielding 4.6% makes for a more interesting proposition.

Looking for opportunities

Investing, as Buffett notes, isn’t about predicting what share prices will do. It’s about working out how much cash a business is likely to be able to pay out over time. 

It’s not so long since I thought I could get a 6.2% return from BoA. But at today’s prices, I think I have a better chance of achieving this kind of return with Kraft Heinz.

The biggest threat to my thesis is a resurgance in inflation. That would be a nuisance for a number of reasons, but in this context it would be bad for the company’s margins.

Kraft Heinz is investing heavily into its brands though. They’re its main defence against increasing costs and I think these will prove a valuable asset over time. 

Buffett stocks

I’m a big fan of the Berkshire CEO and I’m always interested in what the company has been selling. But I always make sure I have my own investment thesis.

By itself, the fact that someone else bought (or sold) a stock isn’t a good enough reason for me to do the same. While I’m buying and selling Buffett stocks, I’m making sure I stick to my own ideas.

The post I just sold this Warren Buffett stock… and bought this one instead appeared first on The Motley Fool UK.

In 2023, the US market has been driven up by the ‘Magnificent Seven’ group of mega-tech stocks. But with these shares trading on sky-high ratings, I’m looking elsewhere for value among American companies.

Two US stocks that look too low

In my search for undervalued US stocks, two well-known names leapt out at me. One share I already own, while the other I would very much like to. Here are these two market laggards:

1. Target’s in trouble

My wife and I bought shares in retailing giant Target Corp (NYSE: TGT) in July 2022 for $156.44 apiece

Unfortunately, the Target share price has been in freefall pretty much ever since. As I write, it stands at $110.45, valuing the group at $50.7bn. To date, we’ve lost almost 30% of our initial investment. Ouch.

Over one year, this US stock has lost 27.9% of its value. However, over five years, it’s gained 30.5% (both figures exclude dividends).

I’d gladly buy more Target stock today, had I the cash to spare. That’s because it trades on just 15.1 times earnings, for an earnings yield of 6.6% a year. That’s a lot cheaper than the wider US stock market.

In addition, Target shares offer a comparatively high dividend yield of 4% a year. This is covered almost 1.7 times by earnings for some margin of safety.

Currently, Target faces some strong headwinds, including slowing sales growth, falling earnings and a crime wave driven by mass shoplifting. Despite these problems, I’m optimistic for a sustained recovery in its fortunes, so we’ll hold on tight to our Target shares.

2. Bank of America slumps

In the list of biggest US banks, Bank of America Corp (NYSE: BAC) comes in at #2. But while the US economy has outperformed expectations in 2023, this stock has been sliding.

As I write, BoA stock trades at $27.27, valuing the bank at $216.8bn. This is just 7.1% above its 52-week high of $25.46, set on 6 October. Over one year, the shares are down 11.1%, plus they’ve lost 4.2% of their value over five years. Yuck.

Right now, the stock looks very cheap to me, both in terms of its sector rating and versus the wider US market. It trades on a lowly multiple of 7.9 times earnings, for an earnings yield of 12.7%.

What’s more, the company’s dividend yield is one of the highest among giant US corporations. Even better, this cash yield of 3.5% a year is covered a healthy 3.6 times by earnings. So what’s not to like?

One big problem for US lenders is that credit growth has slowed considerably of late. Also, huge paper losses on banks’ enormous ‘hold to maturity’ bond portfolios are making investors nervous. And loan losses and bad debts will surely rise if the US economy stumbles.

Despite these concerns, I’d gladly buy both US stocks today — if I had some spare cash, that is!

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During his time as Berkshire Hathaway CEO, he’s generated an average annual return of around 20% for shareholders, double that of the S&P 500.

With his conglomerate experiencing this success, I think it’s time I tried to steal some of Buffett’s wisdom in an attempt to replicate it for my own portfolio.

With that, here are two Berkshire holdings I’d buy today if I had the cash.

Apple

First up is Apple (NASDAQ:AAPL). The business has become one of the best-known brands on the planet.

So it’s no surprise that Buffett labels it as one of his best investments, being the backbone of Berkshire’s equity portfolio.

Key to Buffett’s investing strategy is to buy companies you know and understand. And this certainly resonates with Apple.

With over one billion people using its products, it’s easy to see the value of the business.

While far from monumental in size, Apple stock also provides investors with a dividend yield of around 0.5%. For Buffett and his 915m shares, this equated to a payout of nearly $900m last year!

On top of this, the firm has put greater emphasis on creating more value for shareholders. As flagged in its latest results, Q3 saw it return over $24bn to investors.

I also like the moves the business is taking away from its core products. Q3 saw its Services sector report record revenue, including over 1bn paid subscriptions. Earlier this year, Apple also announced the launch of its VR headset, priced at $3,499.

The largest threat to Apple is clearly inflation. As well as rising costs, racing inflation could deter consumers from splashing out on its products and services.

Yet with its market grip and renowned brand recognition, I think Apple is a smart long-term play.

Bank of America

The second stock is Bank of America (NYSE:BAC). There’s been quite a bit of uncertainty across the financial sector this year. And events such as the collapse of Silicon Valley Bank have spooked investors.

However, like Buffett, I buy for the long haul, so I see a host of opportunities within the sector right now, including Bank of America.

The stock takes up slightly less room in Berkshire’s portfolio, but there are still ample reasons to like it. Firstly, it looks cheap. As I write, it trades on a price-to-earnings ratio of below 9. Secondly, it has a dividend yield of over 3%.

On top of this, the bank also posted a strong set of Q2 results, including a 19% jump in net income and a 21% rise in its earnings per share.

Further, it’s benefited from rising interest rates, with net interest income rising 14%.

Given the current economic environment, Bank of America remains constantly under pressure. This has been seen recently as customers demand higher saving rates, in turn potentially impacting the firm’s net interest margin. The lingering threat of recession is also bad news for the bank.

However, with a low valuation and appealing yield, I deem the stock a long-term winner.

The post Warren Buffett owns these 2 stocks. I’d buy them today appeared first on The Motley Fool UK.

Without further ado, here are a selection of their top long-term buy-and-hold investments!

Alphabet

What it does: Alphabet owns Google and other digital properties including YouTube as well as incubating new tech businesses.

By Christopher Ruane. In the long term, I find it hard to be anything other than optimistic about the prospects for Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).

I realise there are risks, from an advertising downturn hurting revenues to the growth of AI reducing demand for search services. But Alphabet is a massively profitable business with a large user base.

Those users have invested time and effort in using its services, making many of them unlikely to switch even if they could find a competitor. In reality, Alphabet is the clear market leader in key areas, such as search. It has proven it can monetise its business model, technology and brands to great effect. I expect that to continue in future.

Fears about the impact of AI have pushed down the Alphabet share price over the past year. I have taken advantage of this to load up my ISA with the shares.

Christopher Ruane owns shares in Alphabet.

Alphabet

What it does: Alphabet is the parent company of Google and several other businesses that include YouTube, Waymo, Deepmind, and more.

By John Choong: Alphabet is one of the world’s few hybrid growth and defensive stocks. It boasts plenty of growth avenues such as its Cloud service, YouTube, and AI-related capabilities, while having an impenetrable economic moat as the world’s biggest search engine.

Sceptics were quick to write Alphabet off when Microsoft launched its ChatGPT-powered Bing. Nonetheless, Google has since come back with an array of its own AI offerings. Most of these haven’t shown much of a competitive advantage. However, it’s worth noting that user numbers continue to tick up for Google despite not deploying its world-class AI functions yet.

And given Alphabet’s war chest of developments and an impeccable financials, I’m confident that the group can continue developing its offerings while retaining its status as the world’s dominant search engine. Pair that with its valuation multiples trading near decade lows, and I’ve been taking the opportunity load up on Alphabet stock.

John Choong has positions in Alphabet.

Advanced Micro Devices

What it does: AMD is a semiconductor company known for its chipsets that power everything from PCs to the PS5.

By Matt Cook. Advanced Micro Devices (NASDAQ:AMD) shares have been some of the fastest growing in recent years. In the last five years, the share price has increased by over 800%. 

I began adding AMD to my Stocks and Shares ISA last year, and it has quickly become my largest holding. I bought the shares based on the excellent performance of the company’s CPU and GPU products.

AMD has been consistently chipping away at Intel’s CPU market share since 2017, and I’m confident that the company will continue to do so. Furthermore, AMD stands to benefit greatly from the rise of AI as companies scramble to purchase the hardware they need to run it.

As I’m more than 20 years from retirement, I want to maximise my Stocks and Shares ISA with growth shares. I’m confident that AMD will continue to do that for me over the next decade.

Matt Cook owns shares in AMD and Intel.

Bank of America

What it does: Bank of America is one of the largest banks in the US. It has both retail and investment banking operations.

By Stephen Wright. I think that investing well is about being aggressive and decisive when share prices are reflecting unjustified pessimism. That’s why Bank of America (NYSE:BAC) is the biggest holding in my Stocks and Shares ISA. 

Since the start of the year, the stock has fallen by around 15%. As a result, it’s reached a level where I think it’s a rare opportunity, so I’ve been buying the stock lately. 

There’s been quite a bit of uncertainty across the banking sector during March. But I don’t think this has adversely affected Bank of America at all.

In fact, the opposite might be true. As customers have been pulling their money from regional banks in fear of liquidity issues, they’ve been depositing them with the larger institutions.

A large base of customer deposits allows Bank of America to make money. And it looks to me like that just got bigger.

Stephen Wright owns shares in Bank of America.

Burberry

What it does: Burberry is a luxury British fashion brand that’s known for its trench coats and distinctive checked designs.

By Roland Head. I bought Burberry (LSE: BRBY) shares early in 2022, at an average price of about 1,700p.

At that time, global travel was still recovering from the pandemic. Lockdowns in China were also creating difficult trading conditions in one of the company’s most important markets.

Burberry’s depressed share price reflected these short-term challenges. I decided that this had created a buying opportunity. I thought the company’s luxury brand and high profit margins would probably drive fresh growth when shoppers could travel freely again.

This has turned out to be correct — store sales rose by 11% during the final three months of 2022, excluding China.

As market confidence has recovered, Burberry’s share price has risen steadily. As a result, my holding has grown from a mid-sized position in my portfolio to become my largest holding.

I’m unlikely to buy more at the current price, but I’ve no plans to sell.

Roland Head owns shares in Burberry.

CVS Group 

What it does: CVS Group operates more than 500 veterinary surgeries alongside diagnostics centres and pet crematoria. 

By Royston Wild. Strong share price appreciation means that CVS Group (LSE:CVSG) is the biggest holding in my Stocks and Shares ISA. 

Since I first invested in early 2020, the veterinary services business has risen more than 50% in value. I have since gone back to the well twice to increase my holdings. And the strength of recent trading is stimulating my appetite to buy more shares.

The company — which operates vet surgeries in the UK, Ireland and The Netherlands — saw like-for-like sales rise 7.5% in the six months to December. This was just off the top end of its organic growth target of 4% to 8%. 

I think CVS is a great safe-haven share to own. The amount people spend to keep their pets fit and healthy remains robust at all points, even when household budgets come under pressure.

And as the AIM business continues to build scale through acquisitions, I expect earnings to steadily rise.

Royston Wild owns shares in CVS Group. 

Glencore

What it does: Glencore is one of the world’s largest natural resource companies with operations across six continents.

By Andrew Mackie: I bought my first tranche of Glencore (LSE: GLEN) shares at the depths of the pandemic crash. Since then, its share price has appreciated far beyond my expectations. However, rather than sell out, I have continued to buy more during significant market sell-offs. Today, it accounts for 10% of my total Stocks and Shares portfolio.

It is first and foremost a growth stock, a fact often overlooked by the market. As a commodities business, most analysts track key metrics from its mining operations over a short time horizon. I don’t believe that’s the correct way to value this business, however.

My conviction on this front has been borne out by the recent proposed merger with Canadian metals producer Teck. To date, this has been rebuffed. Regardless of the outcome here, I remain bullish on Glencore’s long-term prospects.

I have for some time held the view that we are entering a golden era for commodities producers. Glencore is perfectly placed to benefit in the world’s push for net zero. The fact that it is the largest holding in my portfolio reflects its unique position in producing, recycling, sourcing, marketing and distributing the commodities that will enable decarbonisation to become a reality.

Andrew Mackie owns shares in Glencore.

Mastercard

What it does: Mastercard is a payments-processing company. It is the second-largest payments business in the world.  

By Edward Sheldon, CFA. At present, the largest holding in my Stocks and Shares ISA is Mastercard (NYSE: MA). This is not my largest position overall. That’s Alphabet. Yet within this account, the payments stock is top of the pile.

There are a number of reasons I’ve loaded up on Mastercard shares. One is that the company has enormous growth potential. In the years ahead, trillions of transactions are set to shift from cash to card. Mastercard will benefit from this.

Another is that the company has a strong competitive advantage, or ‘economic moat’ as Warren Buffett likes to say. As a payments network operator, it offers services that cannot easily be replicated by a new competitor.

A third reason is that the company offers inflation protection. As prices of goods and services rise, so do its fees, as it takes a slice of every transaction.

Now, Mastercard does have a relatively high P/E ratio. This adds risk. However, this is a high-quality business so I’m comfortable with the higher valuation.

Edward Sheldon has positions in Mastercard and Alphabet.

Meta Platforms

What it does: Meta operates some of the world’s largest social media platforms, including Instagram, Facebook and Whatsapp.

By Gordon Best. The world is more connected that ever, with social media usage continuing to grow, and rapidly increasing content creation. The core of this trend was Facebook, and although use of the platform is declining, others in the Meta Platforms (NASDAQ:META) family are seeing tremendous success. The company therefore has tremendous diversity and agility, with the ability to accommodate multiple demographics across a variety of products. 

The company saw major declines in recent years as investors rejected an expensive metaverse experiment, with the share price now at a level many consider is well below fair value. As the company re-structures, and look to solidify its place as the number one social media group amidst competiton, many analysts have raised their expectations for future performance. I see plenty of untapped potential in Meta’s revenue streams, and once market sentiment improves, many investors will be desperate to pick up shares in Meta at historically low valuations.

Gordon Best owns shares in Meta Platforms.

Visa

What it does: Visa is a global technology company that facilitates digital payments in more than 200 countries.

By Ben McPoland. Warren Buffett recently noted that: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.”

He was speaking of his winning stocks, and I’ve also found the same to be true in my own portfolio. Over the years, Visa (NYSE: V) has blossomed into my biggest ISA holding.

The evidence for the company’s remarkable success isn’t hard to fathom – it’s everywhere around us. We’re all shopping online and paying on our cards almost constantly.  

Visa takes a cut of every transaction that flows through its payments network. That includes currency conversion and cross-border activities, which admittedly does leave the firm vulnerable to events like a pandemic.

Still, its revenue was $30.1bn last year, with a profit margin above 50%! Plus, because it doesn’t lend, it’s not exposed to loan losses.

Enticingly, most of the world’s transactions are still cash-based. So as the world moves towards becoming a cashless one, Visa is poised to keep growing for decades to come. 

Ben McPoland owns shares in Visa.

WisdomTree Physical Platinum

What it does: WisdomTree Physical Platinum is an exchange-traded commodity that provides investors with exposure to the metal.

By Mark Tovey. I bought shares in WisdomTree Physical Platinum (LSE:PHPT) in July 2022. I was 15% in the green by January, but now I’m almost back to where I started.

Why is my biggest holding essentially a “pet rock” that sits idly – paying me no dividends and no rents?

Because I see a mismatch between supply and demand.

Let’s start with supply: 72% comes from South Africa, where labour strikes, power cuts and underinvestment are strangling production. Another 12% comes from Russia.

On the demand side, the metal is increasingly replacing its costlier sister, palladium, in automobiles’ catalytic converters.

The World Platinum Investment Council (WPIC) forecasts supply will be in a deficit of 556,000 ounces in 2023.

However, analysts warn the jewellery component – making up 24% of demand – is fickle.

But overall, I remain bullish – and I’m not the only one. Investment bank UBS predicts platinum’s price will run up by 20% before the year’s out.

Mark Tovey has shares in WisdomTree Physical Platinum.

The post “The biggest holding in my Stocks and Shares ISA is…” appeared first on The Motley Fool UK.

I’ve been using the opportunity to buy shares in two banks this week – Bank of America (NYSE:BAC) and Citigroup (NYSE:C). Here’s why I’ve opted for these over any of the UK bank stocks.

Sell first, ask questions later

Bank shares have been falling lately. But I don’t believe these declines are justified in the case of either Bank of America or Citigroup, which is why I’ve been buying both.

The last month or so has seen some significant stress in the banking sector. I don’t see any sign of the liquidity concerns that have troubled smaller regional banks at either BofA or Citi though.

In fact, the banks I’ve been buying might even be stronger than they were a month ago. The engine of each business is its deposit base, which has been growing as risk-averse customers move their cash.

Despite this, Bank of America shares have fallen by around 19% over the last month. And Citigroup shares are down around 11%.

I’m not saying that either is entirely without risk. That’s clearly not true – each has its own issues to contend with that present concerns for investors. 

Tighter regulations – either for liquidity, or provisions for bad loans – might cut into Bank of America’s profitability. And Citigroup is in the middle of restructuring, which could prove expensive. 

Over the last month though, a sell-first-ask-questions-later approach from investors has seen both stocks fall to levels I think are unjustified. That’s why I’ve been buying them for my portfolio.

Why not UK banks?

Fair enough, but something similar is true of UK banks. So why have I been buying the US banks, rather than Lloyds Banking Group and Barclays?

In my view, the US banks offer better shareholder returns. While Lloyds and Barclays offer attractive dividends, Bank of America and Citigroup also return capital to investors via share buybacks.

When companies repurchase their stock, the number of shares outstanding comes down. As a result, each remaining share accounts for more of the overall business, making it more valuable.

BoA has bought back 30% of its stock over the last decade, meaning each remaining share is worth 40% more. And Citi has repurchased 36% of its shares, resulting in a 56% increase in per share value.

With Lloyds and Barclays, there’s just no comparison. Lloyds has brought its share count down by just under 2% and the number of Barclays shares is higher than it was a decade ago.

That’s why I’ve been focusing on the US banks. As a UK investor, this brings an additional risk of currency fluctuations, but I think the additional return is more than worth it.

The post 2 bank stocks I just bought appeared first on The Motley Fool UK.

It’s almost impossible to tell what share prices will do on any given day. But there are three stocks I’m buying now because I doubt I’ll get a better opportunity for another 10 years.

Aviva

Top of my list is Aviva (LSE:AV.B). But it’s the company’s preferred equity that’s catching my eye right now, rather than the common shares.

I think this is a relatively predictable investment. Unless something goes drastically wrong with the business, the stock is going to return 8.375p in dividends per share each year. 

At a price of £1.18, that’s a 7% return. I’m looking to lock that in right now, because I think it offers a decent return with less risk than most stock market investments. 

If interest rates rise faster than the market expects, then there’s a risk the share price will fall. But I’m not convinced that’s going to happen.

As a result, I’m looking to take the return on offer today, rather than guess at the future. If interest rate increases slow down, I might not get a better shot at this one.

Diploma

I also like the look of FTSE 250 stock Diploma (LSE:DPLM). The company is growing rapidly and I’m not convinced I’ll see it at a lower price than it is right now in the next decade.

The stock doesn’t look cheap at today’s prices. The shares trade at a price-to-earnings (P/E) ratio of 35, meaning that decent returns depend on significant growth in the future.

I think this is likely to happen, though. Diploma aims to increase its revenue and profits by organic growth and through acquisitions.

In fact, the company closed an acquisition earlier this month. And with 700 further deals under consideration, I think the future looks bright here.

That’s why I’m not afraid of the high P/E ratio. I think there’s a long way to go before the growth subsides I expect the shares to be worth a lot more by then.

Bank of America

Lastly, I’ve been buying shares in US-listed Bank of America (NYSE:BAC). Warren Buffett seems to love the stock and I think it’s trading at a good price at the moment.

Put simply, I think that the bank is in decent shape. But the stock market is pricing it like a business in trouble, making it look like a bargain to me.

I’m not expecting another banking crisis in the next 10 years (though I’m not ruling one out). So I’m not counting on seeing the stock at these prices again.

The biggest risk for Bank of America shares right now, in my view, is the possibility of tighter regulation. That might impede the company’s profitability going forward.

I’m not convinced this is likely, though. Even if tighter regulations are coming, I think they would likey have a greater impact on smaller players, rather than Bank of America – and if I’m right, this is a rare buying opportunity.

The post I’m looking for once-in-a-decade opportunities in the stock market recovery appeared first on The Motley Fool UK.

According to billionaire investor Warren Buffett, this is complicated. Here’s what the Berkshire Hathaway CEO has to say on the subject:

We don’t get rich on our dividends that we receive, although we’re happy to receive them. We get rich on the fact that the retained earnings are used to build new earning power, repurchase shares, which increases your ownership in the company and Berkshire has retained earnings since we started. That’s the only reason Berkshire is worth a lot more—it’s that we retain earnings.

According to Buffett, it is possible to build wealth by investing in dividend shares. But it’s not the dividends that the companies pay out that make this happen — it’s the earnings they retain.

Share buybacks

One of the reasons why Buffett thinks retaining earnings is important is that it allows companies to repurchase their shares. This is important. Buying back shares reduces the number of outstanding shares. In doing so, it increases the amount of the business that each share is worth. 

If a company has 100 shares outstanding, then each one is worth 1% of the business. If it repurchases five of them, then each remaining share is worth 1.05%.

Following Buffett’s approach, both of the stocks that I have my eye on use their earnings to repurchase shares as well as distributing cash as dividends.

Bank of America

One of the best illustrations of this in action is Bank of America. This is the second largest investment in the Berkshire Hathaway stocks portfolio. Bank of America has distributed $8.4bn in dividends this year. At today’s prices that’s a yield of 2.44%. 

Importantly, the company has also spent around $11.6bn on share buybacks. In doing so, it has cut its outstanding share count by 3.9%.

Rightmove

That brings me to a UK stock that I think has similar features. The stock is Rightmove (LSE:RMV). Over the last 12 months, the property website paid out £67m in dividends. At today’s prices, that’s a 1.44% dividend yield.

The dividend allows me to increase the number of shares I own. But the company has also spent £146m on share buybacks. As a result, the number of shares outstanding has declined by around 3%. That means the amount of the company for which each of my shares accounts is higher than it was a year ago.

Dividend stocks

I’m looking to add to my investment in Rightmove by buying more shares at today’s prices. I think this is a dividend stock that fits the criteria Buffett looks for to build wealth.

Rightmove shares offer a double boost for investors. The dividend allows me to increase the number of shares I own and the retained earnings being used for buybacks boost the value of each share.

But the stock isn’t without risk. Most obviously, a slowing housing market might well challenge the company’s growth.

In my view though, this is a risk work taking. A strong business that uses its earnings to drive shareholder returns is one I’m happy to own in my portfolio.

The post How to build wealth with dividend stocks using the Warren Buffett method appeared first on The Motley Fool UK.

Apple 

According to Berkshire Hathaway‘s (NYSE: BRK-A) SEC filing, Warren Buffett’s largest holding is Apple (NASDAQ: AAPL). Via Berkshire, Buffett owns 5.55% of the US tech giant’s total shares — a whopping 43% of his equity portfolio. Buffett began building a stake in Apple in 2016 and in his annual letter to Berkshire shareholders he praised CEO Tim Cook for Apple’s share repurchase strategy. 

One factor behind Buffett’s bullishness is the iPhone maker’s competitive advantage. Apple’s ecosystem is created by establishing market standards, encouraging developers to build apps tailored specifically to Apple smartphones. This produces a virtuous cycle, making Apple products indispensable. 

Nonetheless, Apple supplier Foxconn recently suspended its Shenzhen production due to a Covid-19 outbreak in the region. The Apple share price is still high for me, despite being down almost 14% on a three-month basis. Currently, I’m reluctant to deploy a significant amount of my cash reserves buying Apple in one go.

Indeed, Warren Buffett bought his position at an average cost of a quarter of today’s price. I will be buying steadily over the coming months to capitalise on any further dips in Apple’s share price. 

Bank of America 

At over 13% of Berkshire’s holdings, Bank of America (NYSE: BAC) is the second-largest constituent of Warren Buffett’s portfolio. The stock’s P/E ratio of 11.63 fits with Buffett’s value investing philosophy. Shareholders also benefit from a handy dividend yield of over 2%.

The Federal Reserve is tipped to hike interest rates in 2022. Bank of America should benefit from these macroeconomic conditions. Moreover, with a total net income of $32m for 2021, the bank is well placed to build on strong fundamentals this financial year. 

The stock currently sits almost 20% below its 52-week high in mid-February. Furthermore, the US economy is flashing recession warning signs. Bank of America shares could face further pain, given the bank services around 67 million consumer and small business clients stateside.

Despite these risks, I see Bank of America’s current share price as an attractive entry point to add this Warren Buffett stock to my portfolio. 

Another way to invest like Warren Buffett 

Perhaps the easiest way to mirror Warren Buffett’s investments is buying Berkshire Hathaway shares. The company’s compounded annual gain of 3,641,613% dwarfs the 30,209% gain for the S&P 500 from 1964 to 2021. For me, Berkshire stock carries some of the diversification benefits of an index fund while providing an opportunity to beat the market. 

Investors may worry about Buffett’s age at 91 while Vice-Chairman, Charlie Munger, is 97. Berkshire Hathaway’s share price performance without the duo at the helm is untested. This doesn’t dissuade me from owning the stock, however. I see the potential for future leadership to emulate Buffett’s investing approach beyond his lifetime. 

Berkshire currently has over $145bn in cash on its balance sheet and insurance is a large part of its business. A useful reminder for me that, with share valuations riding high, cash is king for scooping up bargains in the event of a stock market crash. 

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