Why did Warren Buffett’s Berkshire Hathaway Spend Billions on Chevron? Look at “Shareholder Yield.”
By Al Root
April 30, 2022 4:04 pm ET
There is a cottage industry on Wall Street predicting what would Warren would buy. That, of course, refers to Berkshire Hathawa BRK.B –2.55% y (ticker: BRK.B) Chairman and CEO Warren Buffett, one of the most successful investors in history.
This year, amid stormy investing seas, Buffett seems to be focusing on shareholder yield. Other investors might want to pay attention to that value-investing metric.
New Buffett-buying speculation sprouts in May, right around Berkshire’s annual meeting in Omaha, Neb. This year’s speculation is swirling around energy stocks after a note in the company’s first quarter financial filing about a big investment in oil giant Chevron CVX –3.16% (CVX).
“Approximately 66% of the aggregate fair value was concentrated in four companies,” reads Berkshire’s 10-Q report. “ American Express Company , $28.4 billion; Apple Inc. , $159.1 billion; Bank of America Corporation , $42.6 billion and Chevron CVX –3.16% Corp oration, $25.9 billion.” Chevron is a surprise number four. It looks as if Berkshire added about 120 million shares of Chevron in the quarter.
Buffett likes oil these days. Oil prices are up, but a reason he likes the stocks likely is more about how companies are spending their free cash flow. Chevron is giving more of its cash flow back to shareholders instead of investing it.
Buffett, answering an annual meeting question about equity purchases in the first quarter, also cited Occidental Petroleum (OXY), saying its capital return plan was simple and made sense. Berkshire is the largest holder of Occidental stock.
Occidental pays a 13-cent quarterly dividend, which works out to about yield of almost 1%. The company also plans to buy back about $3 billion worth of its own stock over the coming few quarters. The dividend and buyback, at roughly $3.5 billion, are consuming about half of the company’s free cash flow. Most of the remaining cash is going toward debt reduction.
Occidental’s total shareholder yield, which can be defined as dividends and buybacks divided by a company’s market capitalization, is about 7%. Chevron’s total shareholder yield, based on the first- quarter repurchase of stock, is about 5%.
About one third of the nonfinancial companies in the S&P 500 have a total shareholder yield of greater than 5%, based on numbers reported over the past 12 months. That’s roughly 120 firms and gives investors a lot to choose from.
Two other oil-and-gas companies with shareholder yields greater than 5%: Marathon Petroleum (MPC) at about 13% and APA (APA) at about 6%.
The top defense company, based on a screen of S&P 500 stocks, is L3Harris Technologies (LHX), with a shareholder yield of about 9%. One of the top industrial firms is engine make Cummins (CMI) at about 8%. A handful of chemical producers sport attractive yields, including DuPont de Nemours (DD), Dow Inc. (DOW) and Celanese (CE).
It isn’t just old-economy companies. Meta Platforms (FB) and eBay (EBAY) have yields 10% and 26%, respectively. ( eBay bought back about $7.2 billion worth of stock over the past 12 months.)
Logistic giant FedEx (FDX), which trades for just 9 times calendar year 2022 estimated earnings, has a shareholder yield of about 6%. And home-improvement retailers Home Depot (HD) and Lowe’s (LOW) come in at about 12% and 7%, respectively.
A screen isn’t a substitute for a more thorough investigation of a company and its stock. But Buffett’s approach can help investors in uncertain times.
Write to Al Root at email@example.com