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Dogs of Berkshire Hathaway: M&T Bank Corp., GlaxoSmithKline plc, ConocoPhillips, Kraft Foods Inc., and Eaton Corp.

Dogs of Warren Buffett

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guruek
Jun 30, 2009
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(GuruFocus, June 30, 2009)There is a simple investment methodology called “Dogs of Dow”. This is from Wikipedia:
The Dogs of the Dow is an investment strategy popularized by Michael O’Higgins in 1991 which proposes that an investor annually select for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price.


Proponents of the Dogs of the Dow strategy argue that blue chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle. This should mean that companies with a high yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies. Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. The logic behind this is that a high dividend yield suggests both that the stock is oversold and that management believes in its companies prospects and is willing to back that up by paying out a relatively high dividend. Investors are thereby hoping to benefit from both above average stock price gains as well as a relatively high quarterly dividend. Of course, several assumptions are made in this argument. The first assumption is that the dividend price reflects the company size rather than the company business model. The second is that companies have a natural, repeating cycle in which good performances are predicted by bad ones.


In practice, buying five Dogs of the Dow at the beginning of the yield has yielded impressive results. According to Investopedia From 1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging a return rate of 14.3% annually whereas the Dows averaged 11%. The performance between 1973 and 1996 was even more impressive, as the Dogs returned 20.3% annually, whereas the Dows averaged 15.8%. Website www.dogsofthedow.com tracks the dogs of the Dow each year, and according to the website, the investment results for the dogs of the Dow in recent years are mixed.


In GuruFocus, we have other groups of stocks to which to apply the Dog principle. Long term holders, such as Warren Buffett , Bruce Berkowitz, Prem Watsa , Tom Gayner, should provide a good group stocks to choose from. Drawback: they may not hold the stock for as long as the Dow Jones Industrial Index.

There has been no back testing as to how effective this method is, however, it is just another way to select value stocks from the portfolio of one of the most successful investor of our time.


Here are the “Dogs” of Berkshire Hathaway, as chosen from the 41 stocks they own as of 1Q09: M&T Bank Corp. (MTB, Financial), GlaxoSmithKline plc (GSK, Financial), ConocoPhillips (COP, Financial), Kraft Foods Inc. (KFT, Financial), and Eaton Corp. (ETN, Financial)


M&T Bank Corp. (MTB, Financial) -- Yield 5.5%


M&T Bank Corp is a bank holding company. They have two primary bank subsidiaries: Manufacturers and Traders Trust Company and M&T Bank National Association. The banks collectively offer a wide range of commercial banking trust and investment services to their customers. M&T Bank Corp. has a market cap of $5.71 billion; its shares were traded at around $51.35 with a P/E ratio of 13.1 and P/S ratio of 1.4. The dividend yield of M&T Bank Corp. stocks is 5.5%. M&T Bank Corp. had an annual average earning growth of 10.2% over the past 10 years. GuruFocus rated M&T Bank Corp. the business predictability rank of 4-star.


Warren Buffett held around 6.7 million for Berkshire Hathaway portfolio MTB since before year 2000.


GlaxoSmithKline plc (GSK, Financial) – Yield 5.3%


GlaxoSmithKline is one of the world's leading research based pharmaceutical and healthcare companies. GlaxoSmithKline plc has a market cap of $91.99 billion; its shares were traded at around $35.47 with a P/E ratio of 9.9 and P/S ratio of 2.1. The dividend yield of GlaxoSmithKline plc stocks is 5.3%. GlaxoSmithKline plc had an annual average earning growth of 8.4% over the past 10 years. GuruFocus rated GlaxoSmithKline plc the business predictability rank of 3-star.


GSK has been in the portfolio of Berkshire since 1Q08.


ConocoPhillips (COP, Financial) -- Yield 4.5%


ConocoPhillips is a major international integrated energy company with operations in some 49 countries. ConocoPhillips has a market cap of $62.54 billion; its shares were traded at around $42.21 with a P/E ratio of 4.8 and P/S ratio of 0.3. The dividend yield of ConocoPhillips stocks is 4.5%. ConocoPhillips had an annual average earning growth of 19% over the past 10 years.


Warren Buffett initiated a 16 million share position in COP in 1Q06. He owned as much as 84 million shares of COP by 3Q08, but has been seen selling since then. He owns 71 million shares as of 1Q09.


Kraft Foods Inc. (KFT, Financial) -- Yield 4.5%


Kraft Foods Inc. is the largest branded food and beverage company headquartered in the U.S. and the second largest in the world, Kraft Foods Inc. has a market cap of $37.67 billion; its shares were traded at around $25.58 with a P/E ratio of 13.5 and P/S ratio of 0.9. The dividend yield of Kraft Foods Inc. stocks is 4.5%.


Warren Buffett started with a 69.5 million shares position in 2Q07, he built his position to 138 million shares by 1Q08 and stayed there since.


Eaton Corp. (ETN, Financial) -- Yield 4.4%


Eaton Corporation is a global diversified industrial manufacturer. Eaton is one of the leaders in fluid power systems electrical power quality and controls automotive air management and fuel economy and intelligent truck components for fuel economy and safety. Eaton Corp. has a market cap of $7.55 billion; its shares were traded at around $45.62 with a P/E ratio of 9.3 and P/S ratio of 0.5. The dividend yield of Eaton Corp. stocks is 4.4%. Eaton Corp. had an annual average earning growth of 7.4% over the past 10 years


Warren Buffett has 3.2 million shares of ETN in Berkshire Hathaway as of 1Q09. He held the stock since 3Q08.


Afterthoughts


In the past quarter, we have seen many Warren Buffett holdings outperforming Berkshire Hathaway itself. As Buffett would tell you himself, when come to investing, entry price matters. The stocks that have gone too much in short term may not be the ones delivering superior return in long term. So far this quarter, investing like Buffett (imitating his portfolio) beats investing with him (holding Berkshire Hathaway).


On the other hand, if you want to invest like Warren Buffett, but do not want to limit yourself within Berkshire Hathaway holdings, GuruFocus developed a stock screener based on investment tenet of Warren Buffett and Charlie Munger so you can invest like Warren Buffett. To make it even easier for our users, GuruFocus has started publishing a news letter based on our Buffett-Munger stock screener. Starting from June 2009, each month, we screens, research and recommend on two stocks. The first issue is available through this link. The report is free for premium members.



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