“Warren Buffett Retirement Plan — Most Inexpensive Stock, Most Boring Stock, and the Stock that acts like a Bond”

by Travis Johnson, Stock Gumshoe | April 28, 2010 2:23 pm

Well, if the last ten years have taught us nothing else, we should have learned that this has been a spectacular time to promise that your investments are like Warren Buffett[1]’s, or to sell folks on the idea of the “next” Berkshire Hathaway or Oracle of Omaha.

I’ve written about probably dozens of stocks that purport to follow in Buffett’s footsteps over the years, but it’s been quite a while … so today’s ad for Top Stock Insights[2], one of Ian Wyatt[3]’s newsletters, caught my eye. Here’s what he touted in promising that he could sell you something that he calls the “Warren Buffett Retirement Plan:”

“Invest in these 3 stocks ahead of The Oracle’s May 1st Shareholder meeting for maximum profits

• The 6% dividend yielding blue chip
• An American micro-cap home products company
• The bio-tech giant with growth potential”

So if these are going to make us even a little bit more Buffett-y, well, put me first in line… but as you might expect, I’d rather not shell out a hundred bucks just to find out about these three stocks. So let’s put our deerstalkers on, shall we? The game is afoot!

Clues, please:

“Warren Buffett Retirement Plan Stock #1 — America’s Most Inexpensive Company

“You might own shares of Procter and Gamble (NYSE: PG), the ubiquitous home products company, but unless you bought shares in 1989 ahead of Warren Buffett, you probably haven’t made very much money.

“If you did buy before Buffett, you’d be sitting on gains of over 1,000%.

“There are no guarantees in the investment world, but if you do the work and buy the kinds of stocks that Buffett buys today, you put yourself in the position to make similar gains.

“Like with The Warren Buffett Retirement Plan stock #1: a home products company with a rock bottom PE of just nine. That’s why I call it ‘America’s Most Inexpensive Company.’

… With only around 4 million shares around, it’s tough for Warren (and other big players) to build a position without making too much fuss and actually moving the share prices by their own buying.

“And today, this company is a spitting image of Procter and Gamble. It manufactures goods in three sectors: Housewares/Small Appliance, Defense[4] Products, and Absorbent Products. Procter and Gamble manufactures products in the Beauty, Health and Well-Being, and Household Care sectors.

“It’s based in the United States , but it has strong global sales to take advantage of growing overseas economies–just like Procter and Gamble.

“And like Procter and Gamble, it’s a simple business with very clear profit centers. You could buy this company and fall asleep for ten years and not have to worry about it–it’s what Buffett calls a Rip Van Winkle business.

“The company was founded in 1905, and they haven’t changed much since then–they make many of the same products and reward their shareholders with steady profits….

“… if you want to own a great American company with solid profits, year in and year out, with a $1 dividend, then you owe it to yourself and your portfolio …”

So who is this? Thinkolator sez: National Presto Industries (NPK)[5]

This is a small cap stock, around $700 million in market cap and a beautiful balance sheet ($160+ million in cash, no debt), and they do indeed operate in those three segments, selling cooking gear and appliances like pressure cookers and the like, ordinance-related stuff in the defense segment, and adult diapers. An odd mix, to be sure, but a profitable one — the stock was quiet for many years, but you can’t call it quiet now. The shares ebbed and flowed in the $40 range for about ten years until they started taking off several years back, getting more volatile, and leading to a huge spike during the recovery that brought them up to the current range (right now it’s at about $114).

And yes, they do have a $1/year dividend, though it’s reported as a paltry yield given the relatively high stock price — just under 1% right now. That’s quite misleading, though, because the company has a long history of very large special dividends[6], including this year when they paid out an extra $7.15 on top of the regular $1 for a yield of more like 8%. Still, they pay annually and this year’s dividend is already paid, so you’re not getting that dividend if you invest today, you’d have to wait until next year to see what dividend they declare. The announcement of that dividend, and the overview of their 2009 results, is here[7].

Interesting company, and I’d actually probably agree that this one has at least a little bit of the Buffett appeal to it — boring industries, solid management with heavy insider ownership, good cash generation. Doesn’t mean he would buy them if he could, of course, or that this isn’t the peak of their performance, I haven’t looked closely at their segments or where they’re making money … still, a good yield, a discount valuation, and prospects that seem fairly steady, if not particularly inclined for significant growth, maybe worth some deeper research.

Next?

“Warren Buffett Retirement Plan Stock #2: The Stock That Acts Like a Bond

“In 2002, Warren Buffett purchased his first ever telecom investment. Called Level 3 Communications (NASDAQ: LVLT), the company caught Buffett’s attention because of its exclusive 9% yield bond….

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“9% a year isn’t bad. But regular investors like you and me will never see a deal like this one until we’re reading about it in The Wall Street Journal.

“BUT, you can buy a similar telecom company’s stock and receive a yield of 6.4%.

“I call it ‘The Stock That Acts Like a Bond’ because this company has some the most reliable growth in the market. In the past 25 years, this company has tripled. That’s about a 4.5% annual gain.

“And it pays a 6.4% dividend that you can set your watch to.

“Add those two together, and you’re looking at nearly 11% gains per year on average. That’s better than the 9% yield Buffett got on his telecom bond. And way better than the 0.5% your bank is paying on a CD right now….

“There are no thrills in the steady path to wealth. There are no tricks. But there are consistent and steady profits that lead to truly liberating wealth.”

No tricks? No thrills? Come on! Where’s the fun in that? Makes me think Wyatt hasn’t been reading some of his other newsletters, but still, who is this company?

Well, you might have guessed that a “steady as she goes” telecom stock with a 6.4% dividend yield narrows it down quite precisely, but depending on how you interpret the numbers this could probably be either of our big ‘ol high-yield telecoms, Verizon (VZ)[8] and AT&T (T). AT&T has done slightly better over 25 years, but both have roughly tripled since 1985 or so (split adjusted — if you adjust for dividends, too, they’ve done far, far better, adjusted for dividends the shares you bought in 1985 would have cost you just a dollar or two in either one).

Personally, I hold shares in Verizon but can’t complain overly much about either — I like Verizon’s toehold in the fixed line business and FiOS, and I think that they are more likely than AT&T to have positive catalysts in the future (ie, iPhone opens up to Verizon, or Verizon buys out the rest of Verizon Wireless from Vodafone), but I think both are decent “utility” investments at this point, it’s hard to sneeze at a 6%+ yield for companies with at least some growth potential and with solid and predictable cash flow and almost-irreplaceable assets.

So … one more?

“Warren Buffett Retirement Plan Stock #3: The Most Boring Stock in the World

“Just two years ago, Warren Buffett bought one of the most boring businesses in the world: a pharmaceutical company that sells generic drugs called Sanofi-Aventis (NYSE: SNY).

“And like Mr. Buffett, I’m interested in these ‘boring’ types of companies. That’s why I’ve added what I call ‘The Most Boring Stock in the World’ to my portfolio.

“It’s a global pharmaceutical company specializing in the development, production and marketing of generic and proprietary branded pharmaceuticals and active pharmaceutical ingredients, and has more than a century of health-care experience under its belt.

“If you’re yawning, consider that a sign that this company might be the best, safest and most consistent stock you’ll ever own.”

Well, most of those clues are fairly squishy and a lot of the pharma companies have extensive histories or can claim ties to 100+ year old firms, so I have to do a bit of guessing here.

But that second to last paragraph sounded familiar — the exact phrasing “development, production and marketing of generic and proprietary branded pharmaceuticals and active pharmaceutical ingredients” is used frequently by Teva in their marketing materials, so I’ll guess that Teva (TEVA) is our answer today.

If you’re unfamiliar with these guys, they have really joined the big leagues in large cap pharmaceuticals and they’re by far the biggest publicly traded company in Israel[9] (market cap around $50 billion) — they are dominant in many generic drugs around the world, and are also developing their own proprietary drugs. This one has been a barn burner for years — if you went back 25 years for Teva the split adjusted price would be something like 10 or 15 cents, and it currently trades for about $60. The big competition in the years to come, I’d gather, would be from the other big generic companies, like Novartis, and upstarts like the Indian firms (Dr. Reddy’s and others) who are trying to get into the business. Teva is priced for growth but has been reliable grower (forward PE is about 11, but trailing PE is more like 26, the analysts see growth strong enough to keep the price/earnings/growth ratio just barely below 1). It has a small dividend yield as well, roughly 1% (it has been growing over the years, but not consistently), and certainly has a perfectly fine balance sheet (very little debt).

And yes, I have a hard time calling them boring … but Teva is over 100 years old — they started out as a small wholesaler in Jerusalem in 1901, a business that still exists under the same name as one of their subsidiaries.

So there you have it — the three stocks that Ian Wyatt thinks make up “Warren Buffett’s Retirement Plan” … what do you think? Anything you’d like to add to your plan, or do you have better ideas to share? Let us know with a comment below.

Full disclosure: I currently own shares of Warren Buffett’s Berkshire Hathaway and Verizon. I do not own shares of any other stock mentioned, and will not trade in any stock mentioned for at least three days.

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