Berkshire Hathaway‘s (BRK.A 1.67%) (BRK.B 1.52%) chairman and chief executive officer, Warren Buffett, is synonymous with investing success. The Oracle of Omaha has consistently ranked among the 10 richest individuals in the world for decades now.
This status as an all-time great investor is what makes it worthwhile to pay attention to the holdings in Berkshire Hathaway’s investment portfolio. Let’s focus on two picks in particular that could be great buys to start off the new year.
1. American Express: A quality fintech company
Compared to the global pure-play payments processing industry duopoly of Visa (V 1.77%) and Mastercard (MA 2.27%), American Express (AXP 3.23%) may sometimes seem like an afterthought. After all, AmEx’s $112 billion market capitalization is overshadowed by the two leading companies in the industry.
But Amex isn’t being overlooked by Berkshire Hathaway: The holding company’s $22.2 billion stake in AmEx is its fifth biggest, and dwarfs its respective $1.8 billion and $1.5 billion stakes in Visa and Mastercard. So why does Berkshire Hathaway like AmEx so much?
Unlike its peers, AmEx both provides credit to its cardholders and also processes transactions on its own network. Whereas Visa and Mastercard only receive revenue via transaction fees, AmEx generates revenue from annual cardholder fees, transaction fees, and interest charges. While this exposes the company to credit risk that could go along with a recession, its diverse revenue base is a plus.
And just like its peers, AmEx is strongly benefiting from the transition away from cash. Along with tailwinds from higher interest rates, this is why analysts are projecting double-digit annual revenue growth in 2022 (the company expects to release year-end results Jan. 27) and 2023. The company’s higher revenue base is also expected to lead to high-single-digit percentage annual earnings growth during the next five years.
AmEx’s 1.4% dividend yield is just below the S&P 500 index’s 1.7% yield. But with the dividend payout ratio poised to come in at less than 20% in 2022, there should be plenty of room for future growth.
And best of all, dividend growth investors can scoop up shares of AmEx at a forward price-to-earnings (P/E) ratio of 14.2. This is meaningfully lower than the credit services industry average forward P/E ratio of 17.8, which arguably makes the stock a compelling buy.
2. Ally Financial: An interesting income play
With $189 billion in total assets and 10.5 million total customers, Ally Financial (ALLY 20.01%) is a digital financial services giant. Due to surging interest rates and elevated inflation, consumers currently aren’t very eager to purchase a new or used vehicle. But even so, Ally’s revenue edged 2% higher in the third quarter. And as the macroeconomic environment eventually stabilizes, the company’s already-decent financial results should also improve.
Income investors will appreciate Ally’s 4.6% dividend yield, almost triple that of the S&P 500. Given that the company’s dividend payout ratio will clock in at about 20.4% in 2022, this dividend is very sustainable.
To top it all off, the stock is dirt cheap at a forward P/E ratio of 6.7. That’s markedly less than the credit services industry forward P/E ratio of 17.8. This extreme undervaluation explains why Berkshire Hathaway owns a 10% position in the company worth just shy of $800 million.
Ally is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Kody Kester has positions in Mastercard and Visa. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.