Warren Buffett’s Top Dividend Stocks Priced at a Value

Are you looking for top dividend stocks for your portfolio? Why not look at what the Oracle of Omaha holds and see which ones are priced at a value? Well, I’ve done the work for you already. They include American Express Company (NYSE:AXP) and International Business Machines Corp. (NYSE:IBM). I will outline why they’re good values for a dividend portfolio today.

Here are Warren Buffett’s top dividend stocks that are priced at a value, when I cross-referenced with a couple fundamental analysis sources.

Is American Express Company Your Dividend Stock?

American Express Company is Berkshire Hathaway’s fifth largest holding worth over $11.6 billion that equates to 15% ownership in the company.

Business Overview

American Express is a global services company. Its main products include charge and credit cards, and travel services that are enjoyed by consumers and businesses around the world. As of March 1, 2015, American Express brought in annual revenue of $34.3 billion and net income of $5.9 billion.

Valuation

At $77 per share, American Express is priced roughly at a multiple of 12.6 with estimated earnings growth of 13%. Using a multiple of 15, American Express shares would be worth roughly $94. This implies American Express is priced at a discount of 18%. This margin of safety is more conservative than Morningstar’s fair value estimation of $95.

American Express Company fundamental analysis graph

Dividend

From 2005 to 2014, American Express has increased its annual payout from 48 cents to 98 cents per share, a compound annual growth rate (CAGR) of 8.3%. It last increased its dividend in June by 11.5%. Now, its projected annual payout is $1.16 per share.

Its payout ratio ranged between 15% to 47% in the last decade. With a current payout ratio of around 23%, American Express’ dividend is safe and bound to continue to grow at a double-digit rate in line with earnings growth estimates.

Expected Returns

At $77, American Express yields 1.5%. With earnings estimated to grow 13% a year in the foreseeable future, one can expect returns of 11-14%.

Is International Business Machines Your Dividend Stock?

International Business Machines is Berkshire Hathaway’s fourth largest holding worth over $11.8 billion that equates to 8% ownership in the company.

Business Overview

IBM is an information technology company. Its multi-year transformation has caused revenue to stagnate in 2012 and 2013, and then decline in 2014 to now. That’s why the stock price has come down 30% from a 2013 high of $213 to the present $149 level.

However, it is making some progress. In 2014, its business analytics revenue increased 7% to $17 billion. As well, its cloud revenue increased 60% to $7 billion in that year. By the end of 2015, IBM expects to have 46 data centers around the world.

Further, IBM has partnered with Apple Inc. to develop business apps across industries such as retailers, bankers, financial advisors, and law enforcement officers. These apps are built only for iPhone and iPad with analytics capabilities and connection to core enterprise processes.

Valuation

At $149 a share, IBM is priced roughly at a multiple of 8.5 with estimated earnings growth of 8.8%. Using a multiple of 12, IBM shares would be worth roughly $215. This implies IBM is priced at a discount of over 30%. Morningstar has a more conservative fair value estimate of $174, implying the shares are discounted by 14%.

International Business Machines fundamental analysis graph

Dividend

From 2005 to 2014, IBM has increased its annual payout from 78 cents to 4.25 cents per share, a CAGR of 20.7%. It last increased its dividend in May by 18.2%. Now, its projected annual payout is $5.2 per share.

Its payout ratio ranged between 15% to 30% in the last decade. With a current payout ratio of around 30%, IBM’s dividend still has ample margin of safety for growth.

Expected Returns

At $149, IBM yields 3.5%. With earnings estimated to grow 8.8% a year in the foreseeable future, one can expect returns of 10-12%.

In Conclusion

Both American Express and IBM are priced at double-digit discounts to their fair value estimates. So, they are expected to deliver double-digit returns of 10% or more for long-term investors. I believe they’re top dividend stocks for consideration today.

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Disclosure: At the time of writing, I am long IBM.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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2 thoughts on “Warren Buffett’s Top Dividend Stocks Priced at a Value

  1. Passive Income Earner Post author

    Hi Bernie,
    Yep, IBM is down 5.8% today. it’s tough on shareholders. Just like anyone else, I don’t know where the bottom is, but the transformation is slow because it’s such a huge company. Dollar-cost averaging on dips or waiting for a turnaround are possible strategies if you want to be long.
    PIE

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