Warren Buffett is Gates’ collaborator in many of his charity efforts and donated much of his fortune to the Bill & Melinda Gates Foundation, along with being a trustee. The two men also both have Berkshire Hathaway (BRK.A)(BRK.B) in common. Gates joined the board of Berkshire Hathaway in 2004, and his foundation owns 81,859,555 B shares of the company.
Buffett seeks cash-rich companies that trade for less than their intrinsic value, and then holds them for the long term. In regards to his legendarily effective investing approach, Buffett has stated, "We want businesses to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price."
The two superstars of business have four stock holdings in common: CocaCola Co. (KO), Walmart (WMT), Costco (COST) and Exxon (XOM).
CocaCola Co. (KO)
Warren Buffett owns 200,000,000 shares of KO, valued as $13,458 million as of June 30, 2011, which accounts for 25.7041% of his equity portfolio, or 8.74% of shares outstanding. He has held 200,000,000 shares of Coke since before 2006. Bill Gates owns 11,682,000 shares of KO, valued as $786 million as of June 30, 2011, which accounts for 5.1872% of his equity portfolio.
The Coca-Cola Company is the world's largest beverage company and is the producer and marketer of soft drinks. CocaCola Co. has a market cap of $153.7 billion; its shares were traded at around $67.1 with a P/E ratio of 18.29 and P/S ratio of 4.38. The dividend yield of CocaCola Co. stocks is 2.8%. CocaCola Co. had an annual average earnings growth of 7.3% over the past 10 years. GuruFocus rated CocaCola Co. the business predictability rank of 4-star.
Buffett first purchased stock in Coca-Cola in 1998, buying over $1 billion worth of stock, or 6.2% of the company. Between 1989 and 1999, Coke’s market value rose from $25.8 billion to $143 billion, according to DailyWealth.com.
Aside from a brief downturn in 2006, Coke has increased its free cash flow every year for the last 10. In 2010 it generated $7.5 billion compared to $6.3 billion in 2009. Earnings per share in 2010 reached $5.09, up from $2.94 in 2009. The company repurchased $3.1 billion in stock and increased its dividend payment for the 49th consecutive year.
Because of a growing emphasis on health awareness, coke is diversifying into less sugary products. In 2010, Coca-Cola accounted for nearly 400 million unit cases of incremental volume, the largest incremental growth since 2007. Minute Maid Pulpy became Coke’s 14th brand to rake in $1 billion in annual retail sales. The company sees potential for growth particularly in North America’s teen population and through acquiring the entire North American business of Coca-Cola Enterprises Inc. (CCE).
Walmart Stores (WMT)
Warren Buffett owns 39,037,142 shares of WMT, valued as $2,074 million as of June 30, 2011, which accounts for 3.962% of his equity portfolio. He has held Walmart since the third quarter of 2009 when he bought 17,892,342 shares at an average price of $49.94. The next quarter, he bought 1,200,500 for an average price of $52.51. Bill Gates owns 9,753,000 shares of WMT, valued as $518 million as of June 30, 2011, which accounts for 3.42% of his equity portfolio. Gates bought at about $50 per share.
Walmart Stores, Inc. is the world's largest retailer. Walmart Stores has a market cap of $172.76 billion; its shares were traded at around $52.3 with a P/E ratio of 11.59 and P/S ratio of 0.41. The dividend yield of Walmart Stores stocks is 2.93%. Walmart Stores had an annual average earnings growth of 11.1% over the past 10 years. GuruFocus rated Walmart Stores the business predictability rank of 5-star.
Walmart has had positive financial results over the last several years. Sales, revenues and cash flows have all been increasing. The exception is the dip in cash flow from $14.1 billion in fiscal 2010 to $10.9 billion in fiscal 2011, partially due to increased investment in inventory, and partially offset by an increase in accounts payable.
While earnings have increased, Walmart’s stock price has risen just 4% over the last decade, and its P/E ratio is near a historical low of 11.59. It has also increased its dividends 18% over the last 10 years and repurchased 7 million shares. For these reasons, Steve Romick believes the stock is cheap. In a recent WealthTrack interview, he said that his fund treats Walmart as an “infinite duration bond with a rising coupon.”
Walmart can also brag that its online movie business, VuDu, beat Sony and Amazon (AMZN), and now competes directly with Apple (AAPL), says a new report from Screen Digest/IHS.
Costco Wholesale Corp. (COST)
Warren Buffett owns 4,333,363 shares of COST, valued as $352 million as of June 30, 2011, which accounts for 0.6724% of his equity portfolio. Buffett has owned shares of Costco since before 2006. In the first quarter of 2010, he sold 920,639 shares at an average price of $59.68. Bill Gates owns 6,128,000 shares of COST, valued as $498 million as of Jun. 30, 2011, which accounts for 3.2852% of his equity portfolio.
Costco Wholesale Corp. operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. Costco Wholesale Corp. has a market cap of $31.87 billion; its shares were traded at around $74.36 with a P/E ratio of 22.26 and P/S ratio of 0.41. The dividend yield of Costco Wholesale Corp. stocks is 1.32%. Costco Wholesale Corp. had an annual average earnings growth of 8.3% over the past 10 years. GuruFocus rated Costco Wholesale Corp. the business predictability rank of 5-star.
Costco is able to offer lower prices by eliminating extraneous retail costs, such as salespeople, fancy buildings, delivery, billing and accounts receivable. Their extremely low overhead allows them to pass savings on to members. Costco’s operating margin and net margin are only 2.7% and 1.7%, respectively, and they have kept their margins near those levels for years.
Costco has the sixth highest sales per square foot of all U.S. retail chains, at $998. The company has been growing cash flows for the last three years, from $625 million in 2008 to $2.7 billion in 2010. Costco is also a favorite of Charlie Munger. At his Wesco shareholder meeting in July, he said Jim Sinegal is one of the top retail guys ever, that Costco is a total meritocracy, and they are losing easy money in the short run.
As of today, Costco’s stock trades for $77.01 a share, after a one year increase of 38%. In Costco’s 10-K report, they state that market expectations for their financial performance are high. They add: “We believe that the price of our stock generally reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our comparable warehouse sales growth rates, earnings and earnings per share or new warehouse openings, could cause the market price of our stock to decline, as could changes in our dividend or share repurchase policies.”
Exxon Mobil Corp. (XOM)
Warren Buffett owns 421,800 shares of XOM, valued as $34 million as of June 30, 2011, which accounts for 0.0656% of his equity portfolio. Buffett bought Exxon in the first and second quarters of 2009 at an average price of about $69. In the fourth quarter that same year he sold 854,490 shares at an average price of $71.96. Bill Gates owns 7,643,858 shares of XOM, valued as $622 million as of June 30, 2011, which accounts for 4.1048% of his equity portfolio.
Exxon Mobil Corporation's principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacturing of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. Exxon Mobil Corp. has a market cap of $354.68 billion; its shares were traded at around $69.8 with a P/E ratio of 9.46 and P/S ratio of 0.93. The dividend yield of Exxon Mobil Corp. stocks is 2.61%. Exxon Mobil Corp. had an annual average earnings growth of 9.1% over the past 10 years.
In the second quarter, Exxon’s profit rose 41%, due in large part to high oil prices. The company also had capital and exploration expenditures of a record $10.3 billion, increased 58% from the second quarter 2010. Production increased 10% year over year driven by assets in Qatar and a growing unconventional gas portfolio. They returned over $7 billion to shareholders in the form of share repurchases and dividends.
Exxon has discovered two major oil sites and one new gas site in the deepwater Gulf of Mexico after drilling their first post-moratorium deepwater exploration well.