There’s a lot of talk about what Warren Buffett will do with his nearly $100 billion in cash. Will his Berkshire Hathaway (NYSE: BRK-B) finally pay a dividend?
Or will he make one more mega-purchase to solidify his reputation?
Buffett is about to turn 87 years old, so the time for making a transformative, legacy-solidifying deal is running out.
Buffett’s last mega-deal was in 2015, when he paid $35 billion for Precision Castparts. Buffett tried buying up the Texas utility company Oncor, but was outbid just this week by Sempra Energy. This is the second major Buffett acquisition that has been attempted but failed this year; the other was Unilever (NYSE: UL), which his Kraft Heinz (NYSE: KHC) tried to buy.
The problem is finding a company that’s large enough to move the needle for Berkshire’s $450 billion market cap. It’s unlikely that Buffett will look to his current public equity portfolio, which rules out the likes of Coca-Cola (NYSE: KO) and American Express (NYSE: AXP).
Buffett loves high-returns businesses . . . that is, companies that generate a lot of cash with little debt. Buffett also likes companies that will be around forever and that can make money regardless of the economic backdrop.
Here are the top three companies that Buffett should, and could, buy:
United Technologies (NYSE: UTX)
United Technologies is certainly large enough to move the needle for Buffett, with a $92 billion market cap. It has a 19% return on equity and trades as a relatively cheap stock, at 16.5 times next year’s expected earnings. It provides products to the construction and aerospace industries and generates revenues from across the globe, split across the U.S., Europe and Asia.
A large portion of United Technologies’ business is recession-proof; it has a large project backlog and generates revenue from military spending. Then it owns the Otis brand, the world’s leading maker of elevators and escalators, plus owns a strong HVAC business that includes brands like Carrier.
With all these steady businesses, United Technologies has managed to raise its dividend for 24 straight years. It now offers a dividend yield of 2.4% and could be an attractive Buffett acquisition.
Stryker (NYSE: SYK)
Stryker is a smaller target, with a $54 billion market cap, but one that works well. This is a medical device company that makes medical, surgical and neuro-technology products. The thing to love is that it is heavily exposed to the fast-growing health-care industry. And demographics are in its favor: There will be an additional 12 million people in the United States over 65 years old within the next decade, which will benefit Stryker.
Stryker has managed to mount impressive growth recently thanks to an aggressive acquisition policy. It spent $4 billion on buyouts in 2016. With that, it’s expected to grow earnings at over 10% annually for the next half-decade, double the largest player in the medical device industry, Medtronic (NYSE: MDT).
Honeywell (NYSE: HON)
Honeywell checks a lot of boxes for Buffett. It has an impressive 25% return on equity and a solid balance sheet with a 55% long-term debt-to-equity ratio. And it has a massive market cap of $104 billion that could be meaningful to Buffett’s bottom line.
The beauty of Honeywell is that it has exposure to steady growth areas of the economy. It has a home and building technology business, as well as performance materials business; both are growing nicely. And its aerospace business is one of the biggest in the world. There is a catalyst here too, as time is of the essence for Buffett. An activist investor, Dan Loeb’s Third Point, would like Honeywell to spin off its aerospace business. If Buffett wants to benefit from all the businesses of this conglomerate, he’ll need to act fast.
In the end, will any of the three companies above become a Buffett acquisition? It is possible, but hoping for that is not a sound investment strategy for individual investors.
These three buys are all interesting to investors because they generate solid and consistent earnings. They’re worth owning regardless of whether or not they become a Buffett acquisition and and whether or not he steps up with his bundle of cash.