If you follow the moves of billionaire investor Warren Buffett, you’re likely to pick up stocks for a good price. Buffett goes for stocks that trade for much less than their intrinsic value. The idea is the market will eventually recognize the true value of a company — and that company’s share price will rise over time.
This is part of the strategy that’s helped Berkshire Hathaway, with Buffett at the helm, to report a compounded annual gain of more than 20% over the past 56 years. That’s compared to a compounded increase of 10% for the S&P 500 index. Now, let’s take a look at a Buffett pick that could make you rich.
A company with performance potential
Procter & Gamble (PG 0.61%) isn’t one of Buffett’s biggest holdings. But that’s OK. The consumer goods giant still fits in with his investment strategy of choosing great companies that will perform well over the long term.
P&G is part of our everyday lives. The company sells popular household brands like Tide laundry detergent and Oral-B dental products. About half of P&G’s sales are made in North America — the rest are generated in Europe, Asia, and other parts of the world. P&G’s “fabric and home care” business contributes the most, making up 35% of revenue and 31% of profit.
In recent times, rising transport and commodity costs as well as unfavorable foreign exchange rates have weighed on the company. Still, P&G has managed to deliver growth. The company reported results for the fiscal 2022 full year in July. In the report, P&G said net sales rose 5% to more than $80 billion. And three out of its five business segments reported sales increases in the fiscal fourth quarter.
Over the long term, P&G has demonstrated its strength. The company’s annual revenue and profit have generally gained over the past few years:
And return on invested capital (ROIC) has been on the rise:
ROIC is particularly important because it indicates a company has invested wisely — and is benefiting from that.
Two big advantages
Like many other companies, P&G suffers from higher costs during times of rising inflation, as the company said during its earnings report. But P&G offers two big advantages.
First, it sells products people can’t go without. Even when times are tough. Second, P&G’s brand strength across business segments keeps customers coming back. Seven out of the ten best-selling diaper brands on Amazon, for example, are P&G brands.
Now, let’s talk about valuation. P&G shares trade at 23 times forward earnings estimates. That’s down from more than 28 just a few months ago.
At the same time, as mentioned above, P&G’s earnings continue to grow — defying today’s economic context. P&G pays a $3.65 annual dividend, currently yielding 2.64%. Even better, the company is known as a Dividend King: That means it’s raised its dividend for at least the past 50 consecutive years.
Considering all of these points, P&G looks ridiculously cheap at today’s level.
Now let’s get back to the idea of getting rich. P&G could be part of the recipe if you combine long-term performance and dividend payments. Over the past decade, for example, P&G shares have climbed 100%. So, over time, P&G has helped investors more than double their money.
Of course, it’s never a good idea to put all of your money into one stock and expect that to be the ticket to wealth. Always invest in several stocks and diversify. As part of that strategy, P&G could be a great addition to your portfolio — and a key player in your plan to get rich.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.