Co-authored with “Hidden Opportunities”
Warren Buffett is widely considered the greatest investor in the world. Unlike most billionaires who amassed large fortunes by selling goods and services, Mr. Buffett almost exclusively made his billions by buying and holding quality stocks. As someone who doesn’t own a conventional business but seeks to utilize my savings towards wealth building and financial independence, I couldn’t find a better influence than the Oracle of Omaha.
Enthusiastically, I yearn to glean from the youthful Warren Buffett – a voracious seeker of profits, a champion of competitive edges, and a dividend collector. He fearlessly scoured the financial markets across economic conditions, hunting for undervalued gems with a laser focus and an insatiable appetite to build his massive empire.
Our investing group focuses on mispriced companies run by shareholder-friendly management teams. Most importantly, we seek those with a solid competitive advantage and pricing power to overcome the ill effects of inflation over the long term while continuing their execution during recessions.
Here are two proven dividend stewards with much juice left to keep producing those paychecks.
Pick #1: ENB – Yield 7.6%
Enbridge Inc. (ENB) is a Canadian energy company that primarily focuses on transporting, distributing, and generating hydrocarbons – crude oil, natural gas, and associated liquids. The company moves ~30% of the crude oil produced in North America and transports ~20% of the natural gas consumed in the U.S. In addition, ENB operates North America’s third-largest natural gas utility by consumer count, making it a critical player in North American energy distribution. Source
Enbridge reported record mainline volumes during the quarter, resulting in an impressive 7.7% YoY EBITDA and 2.5% DCF growth during 1H 2023. Year-to-date, ENB executed over $1 billion of accredited tuck-in acquisitions, fortifying its leadership in the industry and expanding the worth of the company’s asset base. The company enjoys high cash flow predictability, with 51% tied to take-or-pay contracts and 47% associated with its regulated gas distribution business. Most importantly, over 95% of ENB’s customers have investment-grade financial ratings.
ENB has an investment-grade BBB+ rated balance sheet with a debt-to-EBITDA of 4.5x (at the low end of the company’s targeted range of 4.5 to 5x). After adjusting for the impact of floating-to-fixed interest rate swap hedges, less than 5% of ENB’s total debt is exposed to floating rates, making its leverage manageable amidst a rising interest rate environment.
ENB boasts 28 consecutive years of dividend increases, and there's much more where that came from. The midstream operator has guided adjusted EBITDA between C$15.9 – $16.5 million, and Distributable Cash Flow between C$5.25-5.65. This provides comfortable dividend coverage with room for healthy growth. ENB’s current annual dividend comes at a modest 65% payout ratio at the guidance midpoint and calculates to an excellent 7.6% yield.
Note:
ENB is a Canadian C-Corp that declares and pays dividends in Canadian Dollars. As such, the payments received by U.S. investors are subject to variation due to USD-CAD conversion prices.
Strategically, ENB is focused on tuck-in acquisitions and organic portfolio growth. The company remains committed to growing the dividend and pursuing opportunistic share repurchases. This is the strength offered by businesses with long-term monetization potential – their assets can pay for future growth pursuits and then some more to reward shareholders. The company has many new projects that will become operational in the coming years. This will be directly accretive to EBITDA and DCF growth through long-term contracts with credit-worthy customers. No wonder the company boldly projects a 5% CAGR EBITDA growth through 2025!
80% of ENB’s EBITDA has natural inflation protections, and the nature of the company’s business allows it to be immune to commodity price fluctuation. In this deeply discounted, shareholder-friendly midstream leader, we find a solid and sustainable income opportunity for years ahead.
Pick #2: MO – Yield 9%
Despite the distasteful nature of tobacco products, there is no denying that the companies operating in this industry have limited competition and are highly profitable free cash flow machines with highly shareholder-friendly capital allocation strategies.
Altria Group, Inc (MO) is one of the largest tobacco companies with a portfolio of highly recognizable brands. It's no secret that combustible tobacco is losing popularity and adoption in developed nations. Despite a 9% YoY decline in shipment of combustible cigarettes and associated revenue decline, MO boasted Operating Companies Income growth during the first half of the year due to its ability to control costs and raise prices to customers. Source
Tobacco products have excellent long-term inflation protection as consumers are willing to pay more to satisfy their dependency. Moreover, troubled economic conditions and recessions are a tailwind for this business, as tobacco products are growingly adopted to combat stress.
Despite MO’s failure with JUUL, the company has remained active in tapping the potential of new category smokeless products like vapes and e-cigarettes. During Q2, the company completed the acquisition of NJOY for $2.75 billion. Notably, NJOY ACE is currently the only pod-based e-vapor product to receive marketing authorization from the FDA, allowing MO to expand the product’s potential in the U.S.
In the coming quarters, we will see MO increase focus on accelerating the adoption of NJOY. Currently, the brand has a minimal retail presence, with 95% of stores lacking a complete inventory of NJOY products. MO plans to grow distribution to 43,000 stores in Q3 and targets to hit 70,000 by the end of FY 2023. This will directly be accretive to MO’s top and bottom lines. Management has provided FY 2023 guidance of the adj. diluted EPS between $4.89 to $5.03.
MO continued demonstrating its ability to use the cash-cow cigarette business to make tuck-in acquisitions and deliver value to shareholders. During Q2, the company repurchased 10.4 million shares for a total cost of $472 million. The tobacco giant had $528 million remaining under its share repurchase program that it intends to utilize within this fiscal year.
Altria has grown its dividend for 52 straight years, and investors can expect 4.3% raise to $0.98/qtr in their September payment. The current dividend comes at a 75% EPS payout ratio (projected) and calculates to a healthy 9% yield.
MO maintains a strong balance sheet with its debt-to-EBITDA ratio of 2.2x. The company comfortably retired ~$1.6 billion in long-term notes at maturity while paying dividends, repurchasing shares, and making acquisitions, indicating strong coverage from all aspects of its cash flow use.
We like MO’s dividend coverage, prudent use of cash flows, high current yields, and growing smoke-free tobacco segment. Amidst a slowing economy, cheaply valued MO presents a fundamentally solid and cash-flow-rich opportunity for growing income.
Conclusion
Warren Buffett has excelled in choosing businesses that have been able to stand the test of time through many economic cycles and raise their dividends to shareholders. Dividends may not be the Oracle of Omaha’s secret sauce, but they're a significant ingredient that keeps chugging cash into Berkshire’s account.
"Growth occurred every year, just as certain as birthdays. All Charlie [Munger] and I were required to do was cash co*ke’s quarterly dividend checks" – Warren Buffett’s 2022 Annual Shareholder Letter
During his wealth-growth phase, Mr. Buffett sought after companies leading their respective industry and those facing some trouble that he believed could be solved over time. He famously mentioned that the best time to buy a business is when it is on the operating table.
Mirroring the qualities that would have enticed a youthful Buffett, ENB, and MO emerge as examples of sound investment choices. These prospects come with a price tag that resonates with extraordinary value, creating an irresistible allure for prudent investors with an eye on sustained income growth to support a vibrant retirement.
If you want full access to our Model Portfolio and our current Top Picks, join us at High Dividend Opportunities for a 2-week free trial.
We are the largest income investor and retiree community on Seeking Alpha with +6000 members actively working together to make amazing retirements happen. With over 45 picks and a +9% overall yield, you can supercharge your retirement portfolio right away.
We are offering a limited-time salefor 28% off your first year. Get started!
Start Your 2-Week Free Trial Today!
