Warren Buffett has built a reputation as one of history’s most successful investors, leading his company Berkshire Hathaway to compound annualized returns of 21% over the last 50 years, which absolutely trounces the S&P 500‘s average annual return of 10% over the same stretch. That’s the kind of incredible performance most investors would be thrilled to replicate, and it should come as no surprise that Buffett-backed stocks tend to attract extra attention.
In this roundtable discussion, three Motley Fool writers profile a stock in the Berkshire portfolio that they believe is worth adding to yours. Read on to see why they picked Teva Pharmaceutical Industries (NYSE:TEVA), Apple (NASDAQ:AAPL), and Sanofi SA (NYSE:SNE).
A great dividend stock
George Budwell (Sanofi): French drugmaker Sanofi has been a staple of Warren Buffett’s top-notch portfolio since 2006 — and for a very good reason. Specifically, this pharma giant is currently entering its 24th consecutive year of dividend growth, making it one of the most dependable dividend growth stocks in the entire healthcare sector. And with a forward-looking yield of 4.38%, Sanofi also pays out one of the richest dividends within its big pharma peer group to boot.
Perhaps most impressively, though, Sanofi has kept its top tier dividend growing even in the face of serious threats to its top line. The drugmaker, for example, lost exclusivity for its flagship diabetes medication Lantus in 2015.
How has Sanofi kept its dividend program on track during this turbulent period? The key has been its extremely productive research partnership with Regeneron Pharmaceuticals (NASDAQ: REGN). This partnership has led to the FDA approvals for cholesterol medicine Praluent and eczema treatment Dupixent in recent years. As a result, Sanofi’s top line is forecast to rise at a compound annual growth rate of 4% over the next six consecutive years. That’s not too shabby for a company with a market cap of a whopping $103 billion.
Sanofi has also been investing heavily in its rare blood disorder franchise by acquiring Ablynx and Biogen‘s hemophilia spin-off Bioverativ to start the year. These back-to-back acquisitions last January brought in multiple late-stage assets, as well as a number of intriguing earlier-stage compounds that could contribute significantly to the biopharma’s growth over the next decade.
In all, Sanofi has done an admirable job of setting itself up for the long term by bringing numerous high-value assets into the fold through external licensing deals or direct acquisitions. And this super aggressive approach to pipeline development should, in turn, keep the drugmaker’s top-shelf dividend program headed in the right direction.
Down but not out generic prescriptions
Nicholas Rossolillo (Teva Pharmaceutical Industries): During the first quarter of 2018, Warren Buffett nearly doubled his bet that generic-drug maker Teva would be able to pull off a turnaround. That may seem like a dubious gamble after a disastrous 2017 that included legal trouble, falling generic prescription prices, and a mountain of debt on the books after the company bought out a couple of rival drugmakers. To make matters worse, the dividend was eliminated along with about 25% of the company’s workforce at the end of 2017 to help shore up cash flow.
At this point, Teva looks a lot more like a distressed asset than it does a value but there’s light at the end of the dark tunnel for the Israeli pharma company. Under its new management team, a $1.03-per-share profit was turned in the first quarter of 2018, and projections for full-year profitability were also given. Teva also said it is on track to save $1.5 billion in expenses this year and $3.0 billion by the end of 2019. That’s a big number considering trailing-one-year revenues are just shy of $22 billion.
Thus, it would appear that the scandal-ridden drugmaker is on a clear path to recovery, at least when it comes to shoring up the bottom line. But what about those declining generic prices? Revenues were down 10% in the first quarter compared to a year ago, but the expectation is that pricing pressure will begin to ease later in 2018. Plus, Buffett’s bet on Teva seems to jive with Berkshire’s team-up with Amazon and JPMorgan Chase to create a company to help lower the cost of healthcare in America. With those powerful names looking to disrupt the status quo, Teva could be a big beneficiary in the years ahead.
Berkshire’s biggest holding
Keith Noonan (Apple): For an investor that was once famously averse to technology stocks, Buffett’s moves to make Apple his company’s largest holding stand out. Also notable is the fact that the Oracle of Omaha only started investing in Apple in 2016.
At the heart of Berkshire’s decision to load up on Apple was the company’s stellar brand strength and the moat created by the interplay between its easy-to-use hardware and software. Those characteristics have helped the Cupertino-based company build a customer base that’s significantly more valuable than those on competing platforms, with the average user on the iOS mobile operating system spending roughly 2.5 times more on in-app purchases than the average user on Alphabet‘s Android platform.
That’s an advantage that’s helping the iCompany deliver rapid growth in its services segment — a particularly high-margin section of the business that thrives on taking a commission of software through its app store and its own internally produced offerings. Sales for the segment climbed roughly 31% year over year in the company’s last quarter, helping to increase total revenue by 16% and earnings by 30%. It looks like there’s still room for growth ahead.
Some industry watchers expect that the head starts enjoyed by Alphabet and Amazon in the smart-speaker space will prevent Apple from building a strong position in the market and the broader smart-home ecosystem. It’s true that Apple has an uphill road to navigate in that space because of its later entry and some current feature disparity, but there’s a good chance the company’s stellar brand strength and dedicated fans will allow it succeed there and further benefit from its high-value customer base.
Apple also has appeal as a dividend-growth stock. Shares yield roughly 1.5%. Last month, the company delivered a 16% dividend increase, bringing its payout growth over the last five years to roughly 68%. With a strong brand, remaining opportunities in high-growth product and geographic market segments, and a non-prohibitive forward earnings multiple of roughly 16.5, Apple is a Buffett stock still worth buying at today’s prices.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. George Budwell has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Nicholas Rossolillo owns shares of Alphabet (A and C shares), Apple, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.