Warren Buffett has a well-earned reputation for spotting businesses with unusually durable competitive advantages. By buying and holding shares of these businesses over long periods, his diversified conglomerate Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has delivered returns far superior to those of the benchmark S&P 500 index over the past 59 years.
So when the Oracle of Omaha and his investing team completely exit a stock position, Wall Street and retail investors alike tend to notice. In the third quarter of 2023, Berkshire curiously decided to sell its entire stakes in Johnson & Johnson (NYSE: JNJ) and Proctor & Gamble (NYSE: PG). Here’s why these two blue-chip dividend stocks are still superb buys for most investors.
Johnson & Johnson: A pivot to specialization
Berkshire Hathaway likely sold its stake in Johnson & Johnson because of the spin-off of its consumer health division into the new company Kenvue. Kenvue owns many popular brands, such as Tylenol, Listerine, and Neutrogena, and generates stable revenues from them.
By spinning off its consumer health business, Johnson & Johnson signaled to the market that it wanted to focus on its core healthcare business, with a heavier emphasis on pharmaceuticals and medical devices. These segments are riskier, more competitive, and have shorter product life cycles. Therefore, Johnson & Johnson no longer fits the profile of a typical Buffett stock.
However, the healthcare giant still sports an array of features that will be attractive to growth, dividend, and value investors. To wit, it is expecting high-single-digit percentage revenue growth in the upcoming years, driven by its impressive pipeline of next-generation cancer, immunology, and neurology drugs, along with its top-notch medical device portfolio.
Johnson & Johnson is also a Dividend King. The healthcare titan has a 61-year streak of dividend increases, and it has raised its quarterly payouts by a healthy 6%, on average, over the past 10 years.
At current levels, Johnson & Johnson offers a 2.95% annualized yield, which is substantially higher than the average yield among S&P 500 listed stocks. And with its shares trading at 15 times estimated earnings, the stock is also slightly undervalued compared to the average for the wider healthcare sector.
Proctor & Gamble: A reliable income generator
Proctor & Gamble is prominent in the household and personal-care product markets. It owns several well-known brands, such as Tide, Gillette, and Old Spice. However, its revenue growth has been sluggish over the past 10 years due to unfavorable currency exchange rates and rising prices.
The company’s revenue increased by only 10.2% over the past 10 years, compared to a 55.8% increase over the prior 10-year period. Wall Street analysts, on balance, expect this anemic growth trend to continue in the years ahead.
Despite its lack of robust top-line growth, Proctor & Gamble stock is still an attractive option for income investors. Proctor & Gamble, too, is a Dividend King, and has increased its dividends for 67 consecutive years.
It has also paid dividends for an impressive 133 straight years and boosted the size of its payouts by a respectable 4.65% per year, on average, over the past 10 years. Moreover, Proctor & Gamble’s 2.5% yield is higher than the average among its large-cap peers, and with a reasonable payout ratio of 60.1%, income investors shouldn’t have to worry about the future of its quarterly payments.
All that being said, this consumer staples stock is unlikely to outperform the broader market anytime soon, making its dividend program one of the main reasons to hit the buy button
Should you invest $1,000 in Johnson & Johnson right now?
Before you buy stock in Johnson & Johnson, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Johnson & Johnson wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of January 8, 2024
George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Kenvue. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2026 $13 calls on Kenvue. The Motley Fool has a disclosure policy.
2 Former Warren Buffett Stocks That Stand Out as Stong Buys in 2024 was originally published by The Motley Fool