warren buffett, Berkshire Hathaway‘s (BRK.A -0.62%) (BRK.B -0.57%) CEO and Chairman of the Board, has been investing since he was 11 years old. That’s more than eight decades for those keeping score. With his net worth of nearly $100 billion, the understatement of the century would be to say that Buffett knows a thing or two about investing.
That’s why holdings within Berkshire Hathaway’s $344 billion investment portfolio are worth paying attention to. Here are three picks with strong fundamentals and bright futures that stand out as smart buys for retail investors.
1. Johnson & Johnson
As the health sector innovates and developing nations mature economically, life expectancy is expected to increase further. The average global life expectancy is projected to increase from 71.7 years in 2022 to 77.2 years in 2050. Longer life will also lead to population growth, which will translate into a larger potential customer base for Johnson and Johnson (JNJ 0.65%).
With blockbuster drugs like immune drugs Stelara and Tremfya, an antipsychotic drug franchise known as Invega, and cancer drug Darzalex, J&J has had no shortage of commercial successes in recent years. This explains why the analyst consensus is that J&J will report a staggering $95.1 billion in revenue for the current year.
And given that the company had 99 projects in clinical development as of July in various therapeutic areas, including infectious diseases and vaccines, immunology and oncology, the future looks promising. This combination of existing products and potential launches explains why analysts predict 4.1% annual earnings growth for the company over the next five years.
J&J’s 2.8% dividend yield is significantly higher than the S&P 500 return of 1.6% of the index. And based on the fact that Dividend King’s payout ratio will be around 44% in 2022, investors can rest assured that the dividend will continue to rise for years to come.
Berkshire Hathaway’s stake in the health care company is minuscule at $53 million. But J&J is a world-class company trading at a relatively cheap valuation. The stock’s forward price-to-earnings ratio (P/E) of 16 is only slightly above the S&P 500 healthcare sector average of 15.4.
2. master card
Having processed $8.1 trillion in transactions in the last four quarters, MasterCard (BREAST -1.38%) is a giant in the world of payment processing, and the pandemic has only encouraged more use by its customers.
The use of cash remained under pressure during COVID-19. With consumers turning to contactless digital payment methods to reduce their risk of exposure to the virus, it’s no surprise that US cash use has dropped more than 20% between 2018 and 2020.
Even when the pandemic finally comes to an end, cash is still likely to drift over time due to the rise of e-commerce and the convenience of alternative payments.
And that’s precisely why analysts believe Mastercard’s earnings will grow at a rapid rate of 22.8% per year over the next five years. These factors explain why it’s no surprise to learn that Berkshire Hathaway owns a $1.3 billion stake in the payment processor.
For those who don’t need immediate income from their investments, Mastercard’s 0.6% dividend yield is a great option. This is because, in addition to its tremendous earnings growth prospects, the company’s dividend payout ratio will be less than 19% in 2022.
Mastercard should see a doubling of its dividend every four to five years for the foreseeable future. Best of all, the stock’s P/E ratio of around 30 is reasonable for a company with such impressive growth potential.
3. United Parcel Service
Delivering 23.1 million packages per day on average during the second quarter, United Parcel Service (UPS -4.55%) It is the largest package delivery company on the planet. Aside from the largest e-commerce retailers, no one stands to benefit more from the encouraging outlook for the e-commerce industry than UPS.
Global e-commerce retail sales are forecast to skyrocket from $4.9 trillion in 2021 to $7.4 trillion by 2025. That’s countless millions more packages each day that will need to be delivered. Since UPS invests billions each year to improve its delivery capacity, there is a high probability that the company will capture a plurality of these additional packages. This is why analysts predict that UPS will deliver 5.7% annual earnings growth over the next five years.
And with a 48% dividend payout rate, the company’s dividend should have no problem growing for years to come. Coupled with its 3.2% dividend yield, this makes UPS an attractive dividend growth stock. Admittedly, Berkshire Hathaway’s position is small at just $12 million. But with a P/E ratio of just 15.2, UPS looks interesting at its current share price of $193.
Kody Kester He has positions at Johnson & Johnson, Mastercard and United Parcel Service. The Motley Fool has positions and recommends Berkshire Hathaway (B shares) and Mastercard. The Motley Fool recommends Johnson & Johnson and recommends the following options: Long $200 January 2023 Call Options on Berkshire Hathaway (B-Shares), $200 Short January 2023 Put Options on Berkshire Hathaway (B-Shares) and Options $265 short buys in January 2023 on Berkshire Hathaway (B shares). Share). The Motley Fool has a disclosure policy.