Recently, we saw Warren Buffett’s Berkshire Hathaway just revealed its latest portfolio. And particularly, we saw its 2 new multibillion-dollar stakes in Verizon stock and Chevron stock.
Let’s dive right into it!
First, Verizon, the biggest purchase so far in the latest reporting for the last quarter of 2020 by Berkshire. We saw that Buffet now owns a whopping $8.62 billion for the 147 million shares in total.
Source: Dataroma / Warren Buffett – Berkshire Hathaway
This is huge, because it now accounts for about 3% of Berkshire’s portfolio holdings.
Verizon Stock Business Overview
Verizon one of the leading telecommunication companies in the United States, with some business in their media arm.
Source: Verizon 2019 Annual Report / Revenue by Segment
You can see from the chart here, the company derives revenue mainly from its telecommunication services. The company segregate this into the Consumer and Business segments, with the Consumer segment taking a lion share. Both operating segments’ key focuses are in providing wireless and wireline communication services and products.
In fact, Verizon dominates the US wireless subscriber market with more than 40% market share.
As for its business classified under Corporate and Other, they include results from their media business, Verizon Media, and other businesses.
Fun fact: Yahoo is owned and managed under Verizon Media, after the $4.5 billion acquisition sealed in 2017.
Verizon Financial Performance
Source: Verizon 4Q 2020 Earnings Presentation / Consolidated Financial Summary 2020
Anyway, overall Verizon has been a pretty stable business even during the Covid-19 outbreak in 2020. We see that the company’s revenue remained pretty stable. It experienced only a 2.7% decline for the whole of 2020, compared to the previous year.
Well, this is understandable, since people are still reliant on the communication network. This is even more so during the pandemic outbreak, where people are forced to work from home.
Therefore, the demand for these telco services are very resilient given our reliance on internet connectivities and wireless communications these days.
Source: Statista / Wireless subscriptions market share by carrier in the U.S. from 1st quarter 2011 to 2nd quarter 2020
So, given Verizon’s dominant position in the market, it is no wonder why the company has been on Buffett’s radar.
Buffett’s History With Verizon
In fact, this is not the first time Buffett bought into Verizon.
Source: Dataroma / Warren Buffet – Berkshire Hathaway
Its history goes back to 2014 when Berkshire started to buy into the company holding about 26 million shares. Then, the conglomerate cut off most of it at the end of 2016. The remaining shares were disposed in the beginning of 2019.
But comparatively, this time round, it was a more substantial amount, 147 million shares bought into Verizon.
Why Buffett Bought Verizon Stock
Anyway, overall I think why Buffett bought into Verizon again is due to 3 things.
First, dividends. Buffett likes to hold stocks with stable dividends. This will allow him ti reinvest these cash into other companies of interest in the future.
Source: Stockrow / Verizon Communications Inc Dividends per Share, quarterly
We can see from the chart that Verizon has been able to increase its dividends steadily over the years, even during the pandemic outbreak in 2020, when many companies are cutting dividends to conserve cash.
The company is able to maintain its dividend payout because of its resilient business that generates strong free cash flow.
In fact, based on the total dividends of about $2.47 distributed for the whole of 2020, at the share price of $55, the dividend yield works out to be a nice 4.5%.
Which means that Buffet can enjoy more than $350 million of passive dividends paid out every year.
(2) Reasonably Valued
The second thing I think why Buffet bought into the company is that, given the hypes and volatility happening in the market in 2020, Verizon seemed pretty decently valued.
Source: Verizon 4Q 2020 Earnings Presentation / Consolidated Earnings Summary 2020
Looking at the latest earnings per share of $4.30, and a stock price of around $55 a share, the P/E is reasonably valued at around the range of 12 – 13.
Source: Yahoo Finance / Verizon Communications Inc 1 Year Share Price Chart
At the current share price of around $55, you may be getting in at a similar or cheaper cost than Buffet did, since he probably accumulated the stocks in the third and fourth quarter of 2020.
Berkshire did not reveal Verizon’s investment during third-quarter filing, as it was granted confidential status. It was only revealed in the latest fourth-quarter filing.
(3) 5G Technology
Thirdly, we think that Buffett is betting on the long-term impact of 5G in the U.S. We can see this from the fact that he is upping his stake in T-Mobile in the latest reporting as well, with 5.2 million shares valued at around $700 million. In fact, Buffett started his position in T-Mobile in the third quarter of 2020 with 2.4 million shares.
So why 5G? Because while everyone is chasing the internet of things and digitization, 5G technology is the one that is going to power and connect millions and millions of devices together. And Buffett is bullish on its long term prospect.
So to sum it up, we think that given (1) Verizon’s dominating market position in its telco business and resilient nature of its operation, coupled with relatively (2) good dividend yield and decent valuation, as well as the bullish prospect of the (3) 5G technology, are the key reasons why Buffett built up his position in the company at the end of 2020.
Next is Chevron. Well, not as big as Verizon stock purchase, but it’s still a big investment. The stake works out to be around $4.1 billion, making up about 1.5% of Berkshire’s portfolio.
This is interesting, because we have been asking our community to look into the oil and gas industry recently. Check out the article here to understand why if you haven’t already done so.
So when I saw Buffett revealed his new stake in Chevron, it kind of confirms our strategy here. But oil prices are recovering, and we are seeing more investors taking note of the oil and gas sector. So move fast before the market shifts.
And this investment in Chevron is a bet that oil demand will fully recover from Covid-19. It will remain elevated for decades to come, despite challenges ahead and the mounting public pressure for oil majors to pivot to greener energy sources.
Why Buffett Bought Chevron Stock
(1) Chevron’s Bet on Conventional Oil and Gas
And i would Buffett is betting on the company’s strategy as well.
Why? Because, unlike their rivals, Chevron is not moving as quickly into the greener energy sources.
In fact, the company doubled down, and continues to expand its oil footprint, closing deals like its $5 billion acquisition of Noble Energy last year.
In terms of renewable energy, Chevron has not made major investments in solar and wind, other than using them to support its own power needs.
Furthermore, CEO, Michael Wirth, stressed that Chevron is not ditching oil and gas. He says that “It will not go away in 20 years. It will still be very important.”
So clearly, Buffett is picking energy companies that are bullish on the conventional oil and gas sources, rather than those looking to pivot aggressively to greener energies.
Source: Stockrow / Chevron Corporation Dividends per Share, quarterly
Similar to Verizon stock, Chevron has been able to pay out dividends consistently to its shareholders.
In fact, the company has been increasing its dividends for the 33rd consecutive year, even during 2020. This is admirable, as 2020 was a crisis when most oil majors cut their dividends to preserve cash.
Given that the total dividends distributed for the full year of 2020 at $5.16 a share, and assuming Buffett accumulated Chevron’s shares at an average price of $80, it will give him a nice dividend yield of around 6.5%.
With a $4.1 billion stake in the company, it should give him more than $260 million of dividends every year.
(3) Reasonably Valued
Source: Yahoo Finance / Chevron Corporation 1 Year Share Price Chart
Speaking of which, again, Buffett probably accumulated the stocks in the third and fourth quarter of 2020. So, looking at the range of prices that Chevron’s share was hovering between $70 to $90, we assume an average cost that Buffett accumulated Chevron was $80 a share.
Source: Stockrow / Chevron Corporation, Chart by Carepital
Chevron’s reported earnings per share for the full year of 2020 was -$2.96. For simplicity, average earnings per share for the past 10 years work out to be about $6 a share annually.
So, at a cost of $80 a share, and average earnings per share of $6, the P/E ratio will work out to be about 13. This is a very decent valuation. That’s why we think that Buffett saw Chevron as reasonably valued, just like Verizon stock.
Therefore, we think the key reasons why Buffett bought into Chevron are that the company is still focused on (1) conventional fossil fuels which is what Buffett is bullish on in terms of the recovery in demand and prices of oil eventually, as well as the relatively (2) good dividend yield and (3) decent valuation at the point of acquiring the company’s shares.
To wrap it up, Buffett seemed to be betting on Verizon stock because he is bullish on the 5G technology to serve the emerging internet of things and digitization. As for Chevron stock, it’s a bet on the recovery of oil prices and demand.
At the same time, we think that these 2 companies were reasonably valued when Buffett acquired the shares. They both have strong balance sheets that can provide good dividend yields and serve as cash generating machines for Berkshire.
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Keep learning and happy investing! 🙂