Marshall Hargrave: The plunging stock market is offering a rare opportunity to buy this top dividend stock for cheaper than billionaire Warren Buffett.
It’s not every day you can buy a stock for cheaper than a billionaire. Especially when that billionaire is Warren Buffett.
Buffett was investing in American Express (NYSE: AXP) in the 1960s. His position has a roughly $1.3 billion cost basis, but is worth over $11.7 billion today.
It has always been tough to beat Buffett to the punch, as many saw when he made his biggest purchase ever the other week – a more than $30 billion acquisition of a company that many people had never heard of: aerospace supplier Precision Castparts (NYSE: PCP). And even fewer managed to beat Buffett to the punch in some of his top stock holdings at Berkshire Hathaway (NYSE: BRK-B).
Many of Buffett’s top holdings have grown into some of the best dividend stocks in the market, with Buffett buying before paying a dividend was “cool.”
Wells Fargo (NYSE: WFC) is Berkshire’s top stock holding, offering a 2.6% dividend yield. Yet, Buffett was buying into Wells Fargo for less than $3 a share in the early 1990s.
Buffett’s second largest holding, Coca-Cola (NYSE: KO), offers a 3.2% dividend yield. He bought into Coca-Cola in the 1990s when the stock was trading for less than $5 a share.
That brings us to Buffett’s third largest holding, International Business Machines (NYSE: IBM). IBM is a stock that Buffett started buying up in 2011. Berkshire owns 8.1% of the company.
But here’s where things get interesting.
Today, with IBM shares trading at around $150, you can buy into the tech giant for cheaper than Warren Buffett paid. Buffett first started buying shares during the first quarter of 2011, back when shares were around $160. His ultimate cost basis is around $170 a share.
Yet, things get even better.
Back when Buffett first started buying IBM shares the dividend yield was 1.75%. Today the yield is over 3.1%. And when Buffett was buying, the company was trading around 11.5 times forward earnings (based on next year’s earnings estimates). Today it’s trading with a forward price-earnings ratio of 9.3.
Buffett mentioned earlier this month that he “loves it when a company goes down,” alluding to the fact that he might be buying more shares of IBM. As of the end of June, he hadn’t added to his position. But since the end of June, shares are down 6% and now 10% below Buffett’s cost basis.
Big Buying Opportunity for Big Blue?
The big question becomes: Should investors take advantage of this unique buying opportunity, or has Buffett fallen into the ultimate value trap?
To start, IBM has paid a dividend for 100 straight years – quite a feat. Plus, it’s still only paying out 33% of its earnings via dividends. IBM still has a diverse business model that supports cash flow growth, and ultimately its strong buyback and dividend.