Since Warren Buffett assumed leadership of Berkshire Hathaway (BRK.A -0.54%) (BRK.B -0.53%) in 1965, the multinational holding company has achieved a remarkable compound annual growth rate of 19.8% through 2023, nearly doubling the benchmark S&P 500's 10.2% total return over the same period.
Given the unparalleled returns, it's always wise to examine Berkshire's current holdings to see which stocks the Oracle of Omaha believes are worth owning. Here are three picks that align with Buffett's timeless investment principles and demonstrate long-term potential for shareholders.
1. American Express
American Express is a Buffet favorite, making up nearly 10% of Berkshire's stock portfolio. Buffett's initial investment in the payments and credit card company dates back to 1991, and since then, it has achieved a remarkable return, increasing from $1.3 billion to about $35.5 billion in value. Notably, the appreciation does not include dividends, which began at $41 million annually and are estimated to be $409 million in 2024.
With returns like that, some investors may think American Express's best days are over, but there's still plenty to like about the company. First, American Express recently reported $15.8 billion in revenue and diluted earnings per share (EPS) of $3.33 for its first quarter of 2024, a year-over-year increase of 11% and 39%, respectively. Management reaffirmed its bullish outlook for 2024, including revenue growth between 9% and 11%, and a diluted EPS increase of 13% to 17%, setting record highs if realized.
American Express operates differently from its competitors, Mastercard (MA -0.76%) and Visa (V -0.63%), in that it serves as a closed-loop network by issuing cards, extending credit to users, and holding the loans on its books. This lets it charge higher merchant fees and annual fees for cardholders. As a result, it is more susceptible to defaults and must record a non-cash expense known as provisions for credit losses for any expected losses that will likely be unrecoverable over the next year. With elevated interest rates weighing on some businesses and consumers, this metric is on the rise for American Express, reaching $1.3 billion for Q1 2024, a year-over-year increase of 18%.
Nonetheless, American Express has $5.4 billion net cash on its balance sheet, and its management prioritizes returning capital to shareholders. Beyond that, the company has paid a dividend since 1989, with a current quarterly dividend of $0.70 per share, representing an annual yield of 1.2%. While American Express doesn't always raise its dividend each year, Buffett noted in his 2022 annual letter to shareholders that he expects the dividend is "highly likely to increase."
Finally, American Express management aggressively repurchases its stock, lowering it shares outstanding by nearly 14% during the past five years, and the board is authorized to repurchase another estimated 95 million shares out of its current 719 million. To quote Buffett again, "The math isn't complicated: When the share count goes down, your interest in our many businesses goes up."
Image source: The Motley Fool.
2. Mastercard
The second Berkshire stock to consider adding to your portfolio is another payment behemoth: Mastercard. As of Dec. 31, Berkshire held nearly 4 million shares. Berkshire's stake in Mastercard and Visa was initiated by its portfolio managers Todd Combs and Ted Weschler, and not Buffett. But Buffett did note at one of Berskhire's annual meetings, "I could have bought them as well, and looking back, I should have."
Mastercard is the second-largest payment processor by market capitalization at $432 billion and has narrowly outpaced the total return of the S&P 500 over the past five years, 95% compared to 87%.
Mastercard, like Visa, operates as an open-loop network: It charges a fee each time a cardholder pays with a Mastercard, though the bank that issued the card holds the loan. Mastercard generated $25.1 billion in revenue over the trailing 12 months and has a five-year revenue compound annual growth rate of 10.9%, surpassing Visa's 9.6%. That higher compound annual growth rate also contributes to Mastercard's higher valuation with a price-to-earnings (P/E) ratio of 39 compared to Visa's 32. And despite elevated interest rates, consumer spending is healthy, with Mastercard Chief Financial Officer Sachin Mehra noting during its most recent earnings call that "consumer spending continues to be supported by a strong labor market and wage growth."
Beyond its financials, Mastercard has paid a quarterly dividend since going public in 2006 and has raised it for the past 13 consecutive years. Today, Mastercard pays a quarterly dividend of $0.66 per share, equating to an annual yield of 0.6%. Also, management repurchased $9 billion worth of stock in 2023, and lowered its shares outstanding by 8.7% during the past five years.
3. Visa
If you didn't notice a theme by now, it should be obvious with the last Berkshire stock: Visa. The company, with a market capitalization of $562 billion, is the leader in the consumer-payments market with 4.4 billion issued cards, generating $33.4 billion in revenue and $18 billion in net income over the trailing 12 months.
Like its competitors, Visa rewards shareholders with dividends and share repurchases. First, Visa currently pays a quarterly dividend of $0.52 per share, equating to an annual yield of about 0.8%. The payments giant has increased its dividend for 15 consecutive years, leading its peers in that category. Next, the company repurchased $2.7 billion worth of its stock in its most recent quarter, leaving $23.6 billion of remaining authorized funds for share repurchases.
Where Visa excels compared to its direct competitor, Mastercard, is its operating margin -- a percentage of revenue a company keeps as operating profit. Visa's operating margin during the 12 trailing months is 67.4%, significantly wider than Mastercard's 58.3% during the same period. Put another way, Visa is more efficient at turning revenue into profit than Mastercard. As previously noted, Visa trades at a lower P/E ratio than Mastercard, making its stock a better valuation.
V Operating Margin (TTM) data by YCharts.
One area to watch for Visa is its total payments volume growth -- or the number of transactions. Management recently lowered its estimate for its fiscal 2024 from low double-digit percentages to high single digits compared to its fiscal 2023, pointing blame at slower-than-expected travel volume in Asia-Pacific.
The slight downgrade could be due to the higher interest rates affecting consumers. Nonetheless, Visa CFO Chris Suh remains positive, recently noting, "Our data does not indicate any meaningful behavior change across consumer segments."
Are these three Warren Buffett stocks worth buying?
Buffett once said, "Payments are a huge deal worldwide," which is reflected in Berkshire's portfolio with these three stocks. Given Berkshire Hathaway's public filings, we can see that the most prominent and longest bet is on American Express with a $35 billion stake. But as an investor, you don't have to choose just one. On Visa's most recent earnings call, its management said the company's total addressable market is $20 trillion. Considering these are the three largest companies in the payments industry today, there is nothing wrong with buying all three, which would offer significant exposure to one of the largest sectors of the economy.
