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3 Underrated Warren Buffett Stocks That Are Smart Buys Right Now

Motley Fool - Mon Feb 5, 2:45AM CST

Many well-known investors have existed throughout history, but few (if any) have gathered the same name recognition and following as Warren Buffett, otherwise known as the Oracle of Omaha. Buffett and his team at Berkshire Hathaway have built the company into an $800 billion juggernaut.

Lots of investors turn to Berkshire Hathaway's portfolio for investment inspiration, and rightly so when you consider its success over the years. If you're looking for a few Buffett stocks to add to your portfolio, the following three are underrated options. They probably won't have eye-popping stock price growth, but they can provide reliable income that investors don't have to second-guess.

1. Coca-Cola

It seems silly calling Coca-Cola(NYSE: KO) underrated, but the market has been iffy on the stock lately. In the past five years, the stock's total returns have been 44%, far underperforming the S&P 500's 95%.

I bring up total returns because you can't talk about Coca-Cola's stock without talking about its dividend. You can expect only so much growth from a 130-plus-year-old company, but Coca-Cola's dividend makes investors' time worth it.

Coca-Cola has a dividend yield of around 3%, with a history of increasing it annually. In the past 20 years, it has increased by over 260%, outpacing its stock price growth.

KO Chart

KO data by YCharts

Buffett likes companies with competitive advantages and a proven track record, and Coca-Cola fits that description. It's been the market leader in its industry for decades and continues to make the investments needed to keep it that way.

By embracing emerging categories, like ready-to-drink alcohol and plant-based drinks, Coca-Cola ensures it doesn't become too complacent or reliant on its flagship sodas. Despite recent underperformance, that's what you want from an investment you plan to hold on to for the long haul.

It makes sense that it's Berkshire Hathaway's fourth-largest holding.

2. Procter & Gamble

Procter & Gamble(NYSE: PG) (P&G) is one of the world's premier conglomerates. Its name may not be instantly recognizable, but many of the brands it owns -- like Tide, Pampers, Old Spice, and Bounty -- are familiar to lots of people.

Economic conditions the past couple of years haven't been kind to P&G, but its recent earnings were reassuring. Its net sales were up only 3% in the second quarter of its 2024 fiscal year, but more importantly, this report pointed to P&G's pricing power. P&G says the increase in organic sales was caused by a 4% increase in higher pricing and a 1% decrease in organic shipment volume.

The long-term strategy can't be to just keep increasing prices, but it does help during slumps. The market doesn't seem to mind, with the stock growing close to 7% in January.

P&G's dividend is one of the most reliable dividends on the market. P&G has increased it yearly for 67 straight years and paid it for 133 years total. An attractive (and stable) dividend plus an array of products that sell regardless of market conditions make P&G a stock you can feel comfortable holding on to for the long haul.

3. Diageo

Diageo(NYSE: DEO) is another conglomerate, focusing on alcohol and related products. It owns brands like Don Julio, Guinness, Casamigos, and many others. With over 200 brands being sold in almost 180 countries, Diageo has an underrated portfolio.

Diageo's stock is down over 15% in the past 12 months, largely due to the company's financial struggles. In the second half of 2023, Diageo's net sales declined by 1.4% year over year, and its organic volume was down 5.2%. The company indeed had an off year, but to panic would be shortsighted.

The company growing free cash flow by $500 million to $1.5 billion in that time was a silver lining. It shows that its financial health is capable of weathering tough times. I expect Diageo to make a recovery and get back to growth. Diageo has a vast portfolio and a global footprint that other companies can't easily replicate.

While the company tries to turn the corner, its dividend should buy it some patience from investors. Diageo's dividend yield is around 2.6% and was recently increased by 5%. Its payout ratio is only 56%, so investors don't have to worry about its stability.

DEO Payout Ratio Chart

DEO Payout Ratio data by YCharts

Diageo is a top player in an industry that has shown resilience for decades. There shouldn't be too many questions about the company's long-term prospects.

Should you invest $1,000 in Coca-Cola right now?

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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Diageo Plc. The Motley Fool has a disclosure policy.

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