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2 Warren Buffett Stocks to Buy Hand Over Fist in May

Motley Fool - Tue May 9, 4:45AM CDT

It has been said many times before, and it will be many times again: Warren Buffett is the greatest investor of all time. And the proof is in the pudding: Despite his considerable philanthropic endeavors over the decades, the Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) chief executive officer consistently ranks among the richest individuals on the planet.

Among the many world-class businesses in Berkshire Hathaway's $345.4 billion investment portfolio, here are two that I think dividend growth investors should strongly consider buying this month.

1. Mastercard: A juggernaut of the payments industry

It's no secret that Buffett and his business partner Charlie Munger prefer to invest in businesses that are profitable and possess competitive moats. Mastercard(NYSE: MA) fits that description, and Berkshire Hathaway owns a 0.4% stake in it valued at $1.5 billion.

In the first quarter, Mastercard's payment network processed $2.1 trillion in transaction volume and 38.8 billion transactions -- a level exceeded only by its peer Visa(NYSE: V). Thanks to their duopoly in the global payments industry, both companies are immensely profitable. Mastercard's non-GAAP (adjusted) net margin was 43.8% during the first quarter, which means that nearly half of the company's net revenue is being converted into profit.

Thanks to its size and scale, Mastercard is well positioned to benefit from the shift away from cash and toward digital payment tools like credit cards and debit cards. As more consumers make greater use of alternative payment methods, the company's payment network will inevitably gain even more momentum. That's because more merchants will accept alternative payments like Mastercard's payment network to try to win business from these consumers.

This is why analysts forecast that Mastercard's earnings will grow at an annualized rate of 18.7% over the next five years -- much higher than the credit services industry's average annual earnings growth forecast of 14%. That growth, coupled with a dividend payout ratio that is expected to be just above 20% in 2023, should translate into double-digit percentage annual dividend growth as well. In my opinion, these growth prospects make up for Mastercard's 0.6% dividend yield, which is well below the S&P 500 index's 1.7% yield.

Growth investors can scoop up shares of Mastercard at a forward price-to-earnings ratio of 26. This is significantly greater than the credit services industry's average ratio of 17, but such a premium is arguably justified by the company's exceptional profitability and growth potential.

2. McKesson: Mission-critical infrastructure for the healthcare sector

McKesson(NYSE: MCK) is yet another Berkshire Hathaway holding that possesses a significant competitive edge. Selling hundreds of thousands of products to more than 200,000 customers throughout the world, including pharmacies and hospitals, McKesson is the largest medical distribution company on the planet. Its $49 billion market capitalization is much larger than that of No. 2 player AmerisourceBergen (NYSE: ABC) at $34 billion.

McKesson's size advantage gives it leverage in negotiations with customers, which helps explain its industry-leading profit margins. And given the growth of older demographics globally, demand for the products that the company supplies should only grow. That's why analysts believe that McKesson's earnings will compound at 11.9% annually over the next five years -- faster than the medical distribution industry's average of 10.3%.

These factors are probably the reason Berkshire Hathaway owns a 2.1% stake in the company worth $1 billion. McKesson's 0.6% dividend yield won't initially impress income-focused investors. But given that its dividend payout ratio is expected to clock in at about 8% for the fiscal year that ended in March, management has plenty of room to boost the payout.

Investors can pick up shares of McKesson at a forward price-to-earnings ratio of just 13.9, which is not much moire than the medical distribution industry's average ratio of 13.4. Considering the company's superiority over its peers, I believe this is an attractive valuation.

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Kody Kester has positions in Mastercard and Visa. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends McKesson and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.

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