Investors often scour the portfolios of well-known investors for stock ideas. When they do that with Warren Buffett's portfolio of stocks, owned within his investment vehicle Berkshire Hathaway (BRK.A -0.47%) (BRK.B -0.60%), they'll find a collection of iconic companies. Two that present very different investment propositions today are American Express (AXP -0.04%) and Chevron (CVX 0.43%). While these two companies are very different, that dichotomy might be the biggest selling point for Chevron.
What do American Express and Chevron do?
American Express hails from the finance sector, describing itself as a globally integrated "payments" company. That's a pretty vague description. What most people will know American Express for is its namesake credit card. It competes with the likes of Mastercard (MA 0.71%) and Visa (V 0.24%). But there's a nuance here because American Express has long focused on higher-end customers. Such customers often spend more and are more resilient to economic volatility, leading to a fairly strong business foundation for this card issuer. So, the fees it collects for processing transactions are highly reliable over time.
Chevron couldn't be more different. It operates in the energy sector with a globally diversified portfolio of oil and natural gas production, transportation, and processing assets. Having exposure to the entire energy sector, from the upstream (production) to the downstream (processing), helps to soften the ups and downs, but Chevron's top and bottom lines are still going to track along with energy prices. Energy prices are prone to dramatic and swift swings.
Which is better: American Express or Chevron?
From a big-picture perspective, conservative investors looking at Warren Buffett's portfolio will probably prefer American Express' business model. That said, there's a small fly in the ointment here. Since late 2023, American Express' share price has roughly doubled. That is a substantial advance in a very short period of time for such a large company.
At this point, American Express looks expensive in terms of all of the traditional valuation measures. To put some numbers on that, the company's price-to-sales ratio is 3.3x versus a five-year average of 2.5x, and its price-to-earnings ratio is 22x versus a longer-term average of roughly 18x. While it would be understandable if investors liked American Express' business model, with its annuity-like revenue stream, it would be hard to suggest that the entry price is attractive right now, noting that the 0.9% dividend yield is near its lowest levels of the past decade.
On the other hand, Chevron is offering a dividend yield of 4.4%. While that yield has been higher in the past, notably during the deep oil downturn that occurred during the coronavirus pandemic, the yield has been in the top half of the range over the past decade. And, notably, Chevron's stock hasn't doubled in price in roughly a year. In fact, the stock has gone mostly nowhere.
While oil prices are the driving force at Chevron, long-term income investors have been well rewarded for sticking around just the same. The energy giant has increased its dividend annually for 37 consecutive years. That shows management knows how to navigate the sector's inherent volatility. And while there's no way to predict oil prices, if you are looking for a dividend stock and don't want to overpay, Chevron seems like a more attractive choice than American Express right now.
Do your own homework
Warren Buffett has an incredible investment record, but he isn't always right. Just because he owns a stock today doesn't mean he would buy it at the current price. So, you shouldn't just look at his list of holdings and start picking stocks. You need to dig in a little bit further. American Express is a good example of what you can end up with if you don't, given that it looks expensive right now. On the other hand, Chevron could be an attractive dividend stock, given its high yield and long history of dividend increases. That is, of course, assuming you are willing to suffer through the inherent volatility of the energy sector.
