After almost 4.5 years of waiting, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett finally pulled the trigger on an acquisition just over a week ago.
With Berkshire Hathaway sitting on a record high of $ 137 billion in cash, cash equivalents and marketable securities at the end of the first quarter, Buffett’s company announced a $ 9.7 billion deal to acquire natural gas transmission and storage assets. of Dominion Energy (NYSE: D). The settlement values the more than 7,700 miles of interstate pipeline that was purchased from Dominion at $ 4 billion, but also includes debt of approximately $ 5.7 billion.
For Buffett, a deal like this makes perfect sense. It increases Berkshire Hathaway Energy’s market share in interstate natural gas transportation from 18% to 18%, and provides Buffett with a true source of income as an intermediary in the natural gas industry. For Dominion, it allows the company to focus almost entirely on its utility assets in the future.
Berkshire Hathaway CEO Warren Buffett at his company’s annual shareholder meeting. Image source: The Motley Fool.
The question is, with the Dominion Energy deal now in sight, which company could be on Buffett’s acquisition radar? While all of the following is pure speculation on my part, I think the following two actions perfectly fit what Buffett is looking for.
DTE Energy
It is no secret that Warren Buffett is a fan of cash cow companies that he can establish and forget. That’s why utility stocks are often a good bet to be the next Berkshire Hathaway purchase. Although previously I thought that the giant of renewable energy NextEra Energy It would be a great fit, it’s too expensive for Berkshire Hathaway right now. That’s what makes the Michigan-focused power company DTE Energy (NYSE: DTE) a logical finalist to be acquired.
For one thing, Buffett is a huge fan of execution. DTE Energy’s management team has continuously provided to shareholders, with a compound annual earnings growth rate of 7.3% between 2008 and 2019, and an annual annual dividend growth rate of 6.1% between 2009 and 2020. The expectation until 2024 it is from 5% to 7% EPS growth, with a target payment increase of 7%.
Image source: Getty Images.
Buffett will also be a fan of the diversity that DTE Energy brings to the table. While more than half of DTE’s operating revenue in 2020 will be generated from its highly predictable electric service operations, the company is also generating revenue based on pipeline and storage fees, as well as its DTE gas services. In addition, its Energy and Industrial Projects segment aims to use renewable natural gas and cogeneration projects to generate a midpoint of $ 130 million in annual operating profit through 2024. Meanwhile, DTE Energy is reducing its dependence on coal, This will represent an estimated 45% of energy production in 2023, down from 77% in 2005.
But most importantly, DTE’s electricity and gas service segments are regulated. While this prevents the company from raising rates at any time it chooses, it also means that there is no exposure to potentially volatile wholesale prices.
What Buffett would get with DTE Energy is highly predictable growth in revenue, cash flow, and profits, with plenty of opportunities on the natural gas and renewable energy side of the equation for further growth. Considering that DTE Energy has dropped 17% so far this year, it seems like the perfect utility stock for Omaha Oracle to consider buying.
McCormick & Co.
Another acquisition that would make a lot of sense to the Omaha Oracle is the spice and seasoning bonnet. McCormick (NYSE: MKC).
As some of you may recall, one of Buffett’s worst investments to date has been his company’s 26.7% stake in Kraft Heinz (NASDAQ: KHC). Buffett assumed he was buying brands that were impenetrable in the consumer packaged goods (CPG) space, but he has observed that organic and smaller players have altered several of Kraft Heinz’s major brands. Although Kraft Heinz remains profitable, its earnings growth trajectory has been disappointing.
Image source: Getty Images.
Buying McCormick could change Berkshire’s fortune in the CPG space. McCormick has a growing line of world-class spices and condiments led by brands like Frank’s RedHot, French’s, Lawry’s and products bearing the McCormick name. McCormick has used this brand recognition to outperform its competitors in the organic growth department, but has also used acquisitions to expand its portfolio and increase its growth potential. In 2017, for example, McCormick acquired the Barry-BQ sauce from Lawry and Stubb.
Like DTE Energy above, McCormick complies. This is a company that has produced eight consecutive years of record operating cash flow, has paid a consecutive dividend since 1925, and in November 2019 announced its 34th consecutive year with increased payments. This makes McCormick one of the few dozen elite dividend payers known as dividend aristocrats.
The best part of the spice and seasoning industry is that it is relatively predictable. Higher and lower food costs can generally be seen months in advance, with consistent demand for spices and condiments in most economic settings. In fact, it could be argued that the 2019 coronavirus disease pandemic is clearly positive for the company, as it will see more Americans return to the kitchen to cook their own meals.
Perhaps the biggest problem here is that McCormick has almost done too well for Buffett’s liking. When Berkshire Hathaway goes shopping, Buffett prefers that his company get great companies at a fair price. Unfortunately for Buffett, McCormick’s superior execution has the company valued at 32 times the estimated earnings for 2020. Even with a long-term sales growth rate of up to 6%, which is far superior among spice suppliers and condiments, this would be a The high price that Buffett must pay to have in his hands what seems to be a truly impenetrable product portfolio.
On the other hand, never say never to a company that may still have more than $ 130 billion in cash on hand.
