Value investing isn't just about buying cheap stocks. A true value investor wants to pay less than something is worth, and the worth of a company depends on its future. A cheap-looking stock in a declining industry with no hope may not be a value stock at all.
For senior citizens, sticking to companies that have durable competitive advantages, meaning that they're unlikely to be upended by competition, is crucial. We asked three of our Foolish investors to each discuss a high-quality value stock well suited for a senior citizen's portfolio. Here's why Walt Disney (NYSE: DIS), Berkshire Hathaway (NYSE: BRK.B), and Wal-Mart Stores (NYSE: WMT) fit the bill.
A lifetime of memories
Danny Vena (The Walt Disney Company): For children young and old, there's a common strand that unites generations: We've all been entertained by the treasure trove of characters in the Disney archives. For more than 80 years, the House of Mouse has added to its stable of celluloid hits, decades before adding theme parks, media networks, Marvel superheroes, and Star Wars Jedis to the mix.
The company has fallen under a shadow in recent years, brought on by fears of cord-cutting. In its most recent quarter, media networks, consisting of TV stations and cable networks such as ESPN, accounted for 41% of Disney's revenue and 46% of its operating income, so it's easy to see why investors might be uneasy.
In spite of these challenges, Disney grew revenue in fiscal 2016 by 6% to a record $55.6 billion year over year, while earnings jumped 12% to a record $9.4 billion. It also pays an increasing dividend that yields 1.5% and represents just 26% of earnings, giving the company plenty of opportunity for future increases. The most recent boost of 10% came earlier this year.
Meanwhile, Disney is not sitting idly by, but positioning itself for the future. A string of recent studio hits demonstrates the depth of its bench, which also provides the merchandising maestro with opportunities to cross-pollinate these newest stars across its consumer-product ecosystem. The company also plans streaming services that will cut out the cable middleman and go directly to consumers, for both its vast library of movies and its ESPN content.
These opportunities will soon eclipse any cord-cutting fears, and investors can reap the rewards. I'm going to Disneyland!
The ultimate value stock
Tim Green (Berkshire Hathaway): Warren Buffett's $440 billion conglomerate should be at the top of every value investor's list. Berkshire operates across a wide variety of industries, including railroads, insurance, energy, retail, consumer goods, and manufacturing. The company's stock portfolio is valued at $160 billion, and it's sitting on nearly $100 billion of cash, waiting for Buffett to use it for major acquisitions.
Valuing Berkshire is difficult, given the investment portfolio and volatile insurance operations. The stock trades for less than 1.5 times book value and about 20 times trailing-12-month earnings. In a market where the S&P 500 sports a price-to-book ratio above 3 and a price-to-earnings ratio around 24, Berkshire seems like a solid value stock to me.
With Berkshire's businesses so widely diversified, and with Buffett known for ensuring that all of his acquisitions and investments come with competitive advantages, Berkshire should survive long after Buffett, now 86 years old, no longer runs the company. Berkshire will have trouble growing its book value and earnings at the same rate it has during the past, given its enormous size. But investors looking for a company that can stand the test of time, and that's available at a lower valuation than the market, should seriously consider Berkshire Hathaway.
An investment with all the gifts
Rich Duprey (Wal-Mart): Investors who are senior citizens often seek out two main ideals when choosing stocks: safety and income. They smartly want to preserve their capital, so betting on some untested, high-flying upstart is out, and they want a regular stream of income coming in through dividend payments. Few investments will provide both items better than Wal-Mart .
Obviously, the retailer is a behemoth with over $490 billion in annual sales. It is able to provide great prices to consumers by buying in huge quantities and squeezing suppliers for the best price. Those savings are passed along to you. And even with the daily upheavals in how people shop, Wal-Mart remains a leader. It may hit a few potholes along the way, but like a battleship on the high seas, much of the daily churn doesn't affect it.
And even when there are significant storms, Wal-Mart fares well. During the market crash a decade ago, the S&P 500 lost almost 38% of its value; Wal-Mart, on the other hand, actually gained 20% because during tough times people turned to the place where they could stretch their wallets.
It also has consistently provided investors with a steady stream of income, paying a dividend for more than 40 consecutive years. With the payout currently yielding 2.5%, senior citizens will find it a respectable stream considering the relative safety that comes with it.
Income, security, growth, and stability are a tough combination to find, but senior citizens can confidently add Wal-Mart to their portfolio and know they'll be getting all four.
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Danny Vena owns shares of Walt Disney. Rich Duprey has no position in any of the stocks mentioned. Timothy Green owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Walt Disney. The Motley Fool has a disclosure policy.