Many investors follow Buffett’s tips and trades obsessively, including myself. His value-driven philosophy is clear: “Price is what you pay. Value is what you get”. His investment fund reported just under £0.8bn in net earnings for FY21. It seems this philosophy holds some truth. 

Berkshire Hathaway also disclosed its total holdings on June 30. Two of the top four shares held are Chevron (NYSE: CVX) and Coca Cola (NYSE: KO) — adding up 15% of its portfolio. I think it’s time to look at whether I should buy these stocks too. 

Chevron

Energy company Chevron currently trades at a share price of $158. The stock dropped 4% last week, having leapt 63% across the last 12 months. Warren Buffett emphasises the need for reliable investing, saying he puts “a heavy weight on certainty”. But can I be certain of Chevron’s long-term prospects? 

The company reported a strong performance in its FY21 report. Net income bounced back from a loss of £0.48bn (all GBP figures at current exchange rates) to a gain of £1.4bn. Also, the stock continued its dividends of roughly 4.5p a share, demonstrating consistent financial strength. 

Yet Chevron’s position in the energy industry makes me uncertain. Governments are increasingly turning away from oil producers. Instead, aiming to use more renewable energy sources and reduce greenhouse gas (GHG) emissions. Management stated intentions to achieve net zero GHG emissions for upstream productions by 2050. 

But I think this transition is too slow compared to other industry players. For example, Powerhouse Energy has already begun development of its fully-renewable energy plants. Because of this, I don’t hold Buffett’s ‘heavy-weight certainty’ in Chevron’s long-term prospects. I won’t be adding the shares to my portfolio right now. 

Coca-Cola

Coca-Cola’s stock has enjoyed a smoother recent journey. The share price has slowly risen just under 10% in the last year, now sitting at $61 a share. 

Yet Coca-Cola didn’t inspire confidence with its recent Q2 report. Operating margins fell from 29.8% to 20.7% year on year. This led to cash flows from operations declining a total £0.87bn. Management blamed this fall on currency headwinds and increased marketing investment. Also, total assets decreased by £1.03bn. This all led to the share price falling 4% in the last month. 

However, it’s not the share price Buffett focuses on. It’s the value found in the business’s core structure that he underlines. In this case, Coca-Cola would seem to be a no-brainer buy. Huge brand recognition and operations spanning across five continents suggest that the beverage titan could be a safe long-term hold. 

But the company has recently suffered sizeable crashes in margins and total assets. Because of this, I think Coca-Cola may not have such good prospects across the coming years. While Warren Buffett has added shares to his portfolio, I won’t be adding them to mine any time soon.

Chevron

Buffett was quite strategic in wanting to take advantage of surging oil prices. He added Chevron (NYSE:CVX) to his portfolio in the first quarter of 2022.

This oil firm has been benefiting from high demand for oil following the war in Ukraine. At the time of writing, WTI crude oil is trading for $104 per barrel. I would have to go back to June 2014 to see anything reaching those price levels.

The company has also increased its presence in the liquified natural gas (LNG) market. It has already concluded a number of sale and purchase agreements over 20-year timeframes.

Given that Russian LNG and oil has been blacklisted, it appears that these commodity markets will remain lucrative for businesses like Chevron over the coming years.

However, the company may soon come under pressure from the Biden administration to increase supply, which could lead to a decline in the oil price and future profits.

Despite this, earnings growth over the past five years has been impressive, and likely a major factor in prompting Buffett to add Chevron to his portfolio. 

Between 2017 and 2021, earnings-per-share (EPS) rose from $4.88 per share to $8.15. By my calculation, this results in a compound annual EPS growth rate of 10.8%. This is something I think Buffett would be happy with.

Citigroup

Another firm he added to his portfolio recently was Citigroup (NYSE:C). The investing and financial services business has performed well in recent times due to increased market volatility.

This volatility has been caused by a number of factors, including the pandemic and the war in Ukraine.

It has resulted in gains in its commodity and foreign exchange (FX) segments, but a decline in the investment banking arm. 

Investment banking has been hit due to broader economic uncertainty. Given the unpredictable situation in Ukraine, there may be further contractions in this segment.

Despite this, the firm still posted revenue of $19.19bn for the first quarter of 2022, beating expectations of $18.15bn.

It’s also possible that Citigroup’s loan and mortgage arm may benefit from rising interest rates, which may hit 2.5% in the US by next month.

This means the company may be able to charge more for its lending services.

Overall, these two additions to Buffett’s portfolio are diverse and take account of the current economic climate. Although he’s bought the shares of many other companies recently, these two really stand out for their potential to grow over the long term. I will be adding both to my own portfolio soon.

Buying the dip

To start with, this stock is one of Warren Buffett’s biggest holdings in his portfolio, at 3.5%. Kraft Heinz, the ketchup giant, has declared a dividend of $0.40 per share, bringing its dividend yield to 4%. With its ex-dividend date coming up on 10 March, I will be looking to buy any dips in its share price in order to maximise its high dividend yield. Additionally, the stock itself has done relatively well as compared to the S&P 500, as it is up 10% year-to-date (YTD). The company also reported superb earnings with positive guidance recently, giving me even more confidence to hold the stock past its ex-dividend date.

4.7% dividend yield on the Verizon

Along with utilities and energy, telecommunication stocks tend to gain a lot of attention in times of a bear market due to their defensive nature, which is why my eyes are firmly set on Verizon. Along with its potential ability to protect my investments more securely as a defensive stock, its 4.7% dividend yield makes it the highest dividend stock within Warren Buffett’s portfolio. Although its ex-dividend date is slightly over a month away in April, I see this an opportunity to conceivably buy shares for a bargain before dividend investors start flocking towards the stock.

Fuel for my portfolio

For all the geopolitical conflict and soaring inflation that has occurred over the past couple of months, Chevron (NYSE: CVX) has been one of the largest beneficiaries. The stock itself has done the complete opposite of the S&P 500, jumping 17% in value (YTD). As analysts forecast the price of oil to shoot up to $120 per barrel, the energy giant stands to continue reaping rewards. For that reason, it should be expected that profit margins will increase, and its dividends along with it. Potential upside to its share price at $143 and a dividend of $1.42 per share gives me the opportunity to hedge my portfolio against any further downside in the overall market, all while also earning me passive income with its 4% dividend yield.

Something to keep in mind

There are a couple of things that are worth pointing out, however. First of all, with all three stocks being US holdings, UK investors will have to account for a potential withholding tax of 15% on any dividends. Secondly, there is also a possibility that the market rebounds from its current position. This could possibly make these companies less attractive as investors may opt for tech and growth positions. Nevertheless, I will be watching how the economic and geopolitical situation plays out over the coming days and weeks as I plan to adjust my portfolio accordingly.

WASHINGTON, DC — BP (LSE: BP) (NYSE: BP.US) still faces uncertainty around its 2010 Gulf of Mexico oil spill lawsuits. Despite this uncertainty, the company’s stock is slowly recovering. Even if BP ends up paying much more than it had initially estimated for the plaintiffs of the oil spill-related lawsuits, is the company’s current price still a bargain?

Oil spill lawsuits

It’s still unclear how the Deepwater Horizon oil spill lawsuit will end for BP. Up to now, the Fifth Circuit Court hasn’t approved BP’s efforts to ward off claimants whose alleged injuries were not a direct result of the 2010 oil spill. BP didn’t account for this provision and could wind up paying much more than it had initially estimated. But there is also a chance, which currently doesn’t seem too high, that BP’s lawyers will succeed in preventing BP from paying BEL claims. The main issue is how high the market currently values BP compared to its peers, which don’t have such uncertainty hovering over their heads.  

Does BP measure up to other oil companies?

Let’s see how BP is priced compared to other top-tier oil companies such as ExxonMobil (NYSE: XOM.US) and Chevron  (NYSE: CVX.US) . BP’s current market value is around $156 billion, and its P/E is relatively high at 15.8. In comparison, Chevron’s P/E is only 12.1. But this measurement doesn’t account for the level of debt or cash on hand, and it considers net earnings rather than operational profits. If we were to use the enterprise value-to-EBITDA ratio, then BP’s ratio is at about 5.8; this is much lower than the current ratios of ExxonMobil and Chevron as indicated in the table below.

Source of Data: Yahoo! Finance

Moreover, the current oil and gas average EV-to-EBITDA ratio is around 6.5. If BP’s value was increased to this average, assuming all else equal, the company’s market cap would reach more than $180 billion. The table below shows the gap difference between the two valuations.

Source of Data: Yahoo! Finance

Based on a market cap of $180 billion, the company’s stock should have been $57-plus rather than $50.

This means, under these assumptions, BP’s valuation is off by $23 billion. In other words, if most of BP’s undervaluation comes from the oil spill lawsuits, the market currently estimates the potential loss in value by $23 billion.

This brings us to the second question: What is the value of the uncertainty around the claims for economic loss?

Until year-end 2013, the company spent $12.8 billion on economic recovery and committed $2.3 billion to economic loss of claims. It also paid under the plaintiffs’ steering committee settlements $2.7 billion. In total, the company allocated $42.7 billion toward all out-of-pocket and spill-related expenses, including government penalties. Currently, the company estimates the economic loss claims will reach $9.2 billion — a higher figure than initially estimated.

Even if we were to consider a worst-case scenario, the company winds up paying $10 billion more than its initial estimates; this doesn’t come close to the $23 lower value the market currently puts on shares of BP. Moreover, the company has already allocated a significant amount of assets toward paying potential additional claims (BP plans to divest $10 billion worth of assets by year-end 2015.) Thus, it seems the market still estimates the company’s future settlements at a higher price than what BP may wind up paying.

In conclusion…

The oil spill settlement is likely to keep curbing BP’s rally. But the current market estimates still seem to undervalue BP’s stock, which should be 5% to 10% higher than its current price.