The bulk of Warren Buffett's stock portfolio is concentrated in Apple (AAPL -1.32%), Bank of America (BAC -0.47%), and a handful of energy stocks, so these companies rightly get a lot of attention. But there are other noteworthy stocks in the Oracle of Omaha's portfolio. Moody's (MCO -0.92%) is one of them. It pays a dividend, but besides that, history says it might almost be about time to start buying. Here's why.
A rock-solid dividend stock, imperfections and all
Moody's is a financial data and credit rating company. Perhaps you've seen Moody's rankings on a company's bonds, helping investors assess how risky it would be to buy the debt. Or maybe you remember Moody's for its role in incorrectly assessing the risk of mortgage-backed securities leading up to the Great Recession of 2007-9. The company does much more than that, with a broad set of services that provide analytics and financial data.
But for our discussion here, know that Warren Buffett's Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%) has 1.9% of its stock portfolio invested in Moody's. That represents a stake of more than 13% in the company. That position was much higher more than a decade ago , when Berkshire held upward of 20% of Moody's stock. Buffett and his company reduced its holdings in the wake of the financial crisis.
Still, Moody's remains a noteworthy Buffett stock. It pays a dividend yielding 1.2% a year. In fact, with the exception of a pause back in 2009, Moody's has been raising its dividend payout for many years. Since 2006, the quarterly dividend has been increased 1,410%. Along the way, the company has also repurchased ample amounts of its own stock in a further return of excess cash to shareholders. Over that span of time, the stock has been a market-beater when accounting for dividends paid.
Data by YCharts.
This financial data stock is deeply out of favor
Moody's long-term market outperformance includes a sharp sell-off in this stock over the past year. Moody's is down 41% from its all-time high reached in late 2021. Moody's Analytics (MA) revenue has continued to grow this year. Revenue in the first half of 2022 was up 20% to $1.37 billion (which includes a few acquisitions in the last year as the company has focused on subscription revenue streams). However, Moody's Investors Services (MIS) doesn't fare so well when economic uncertainty strikes. MIS revenue fell nearly 32% through the first half of the year to $1.53 billion as businesses tighten up their budgets in preparation for a rough road ahead.
As a result, adjusted earnings per share for full-year 2022 are expected to be in a range of $9.20 to $9.70, which would be down 24% from 2021 at the midpoint of the projection. It's also a big downward revision from the $12.40 to $12.90 the company forecasted at the start of the year. Free cash flow in the first half of 2022 was just $628 million, down 49% from last year.
So why might Moody's be a buy now? It's been through numerous recessions in its century-long existence, and once the economy starts to improve, business (and thus the stock) could take off. After the market (and Moody's stock) bottomed in the financial crisis, the shares went on to double several times over in the few years following.
Data by YCharts.
Of course, things could get much worse from here, and Moody's financials could continue to deteriorate. It's still profitable, but keep an eye on that. Free cash flow is currently more than enough to cover the dividend, but not the recent pace of share buybacks ($871 million was repurchased in the first half of 2022). The company had $1.7 billion in cash and short-term investments as of June 2022, offset by $7.2 billion in long-term debt.
As of this writing, Moody's stock trades for about 25 times full-year expected adjusted earnings per share. It isn't cheap, but add this Buffett stock to your watchlist. When the storm clouds over the economy start to clear, Moody's could rocket higher.
