As I write this, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), the conglomerate led by Warren Buffett, has a stockpile of about $85 billion in cash on its balance sheet. While the exact investments Buffett and his team will decide to make next are anyone's guess, we do know what Buffett looks for in his investments, and can apply these principles to find our own "Buffett stocks."
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An industry leader with a wide moat
One stock I'd like to see Warren Buffett buy in 2017 is Realty Income (NYSE: O). Now, I don't think this is a likely Berkshire investment, as real estate is completely absent from the company's stock portfolio, but I think the stock has a lot of Buffett qualities, specifically a low-risk business model, a small debt load, and a fantastic history of dividend growth and total returns.
As far as the business model goes, Realty Income acquires freestanding retail properties and leases them to high-quality tenants, most of which have recession- and competition-resistant businesses. For example, dollar stores and warehouse clubs make up a large portion of the portfolio, and these types of businesses actually tend to do better in tough economies.
Tenants sign long-term (15-20-year initial term) net leases, which require them to cover property taxes, insurance, and maintenance costs. In other words, most of the variable expenses are paid by the tenant -- Realty Income simply collects a predictably growing rent check for a couple of decades.
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Debt makes up just 23% of Realty Income's total capitalization -- low for a real estate business. Debt maturities are well-laddered, and 90% of the debt is fixed-rate, with a weighted average interest rate of just 4.1%
Finally, it's tough to argue with the company's track record. Realty Income has increased its dividend for 77 consecutive quarters at an annualized growth rate of 4.6% (the yield is 4.3% as of this writing). What's more, the stock has generated an annualized total return of 17.9% since its 1994 NYSE listing, an impressive level of performance to sustain for such a long time.
Image Source: Realty Income.
Will Berkshire double down on this tech giant?
One of the stocks I think Warren Buffett should buy in 2017 is one he already owns -- Apple (NASDAQ: AAPL). As of the latest available data, Berkshire owns about 15.2 million shares of apple worth $1.8 billion. This may sound like a lot, but it is rather small in comparison to the size of some other Berkshire investments such as Wells Fargo ($26.8 billion), Coca-Cola ($16.6 billion), or IBM ($13.6 billion). As we head into 2017, I'd like to see Buffett and his stock pickers double down on this one.
For one thing, Apple is still cheap. It has underperformed the market over the past year and since the election, and trades at less than 13 times 2017's expected earnings. And while the company's growth is unlikely to be as impressive as the past (Apple is simply too big to grow rapidly), some of the recent data has been quite impressive.
As an example, Apple's free cash flow grew by 23% year-over-year as of the most recent quarter, and its service revenue from products like Apple Music and Apple pay grew by 24%. Also, Apple's projection of $77 billion in revenue during the holiday quarter would be the company's best yet.
Finally, Apple has the potential to be one of the market's best dividend growth stocks for the foreseeable future. The current 2% yield represents a payout ratio of just 28% of Apple's TTM earnings, leaving lots of room to raise the payout (not to mention the 12-figure cash stockpile). Since Apple first paid a dividend in 2012, the company has increased the payout at a 10.7% annualized rate, and has stated its intention to increase its dividend every year. And I see no reason the company can't keep up its dividend growth rate for years to come.
The bottom line
To be clear, I'm not saying that Berkshire Hathaway will buy either of these -- although I wouldn't be surprised to see the Apple stake increase in 2017. Instead, my point is that these are two "Buffett-like" investments that we can take advantage of.
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Matthew Frankel owns shares of Apple, Berkshire Hathaway (B shares), and Realty Income. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.