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Warren Buffett’s pockets will soon be even more robust.
Buffett’s Berkshire Hathaway (NYSE: NRK-B) will be getting an $8.3 billion check from Kraft Heinz Co. (NYSE: KHC) this week, as the company pays back its 2013 investment. This will only add to the large cash pile of roughly $50 billion on the Berkshire balance sheet – not to mention the fact that Berkshire is generating nearly $1 billion a month in cash.
As Buffett’s proverbial elephant gun is now all but fully reloaded, there’s fresh speculation over the next buyout target.
Coca-Cola (NYSE: KO) is a well-discussed prize that Buffett might try to win. He already owns a sizable chunk of the company and drinks upward of five Cokes a day. However, it would be a mega-deal and would likely be the largest buyout ever, given Coca-Cola’s $200 billion market cap.
Buffett would ultimately have to partner with 3G Capital, whom he partnered with on the Heinz and Kraft deals. The idea is that 3G would use its sizable investment in Anheuser-Busch InBev (NYSE: BUD) and get the beer maker to merge with the soda maker. Or Buffett could partner with Kraft Heinz and 3G on a Kraft-led buyout of Mondelez (NASDAQ: MDLZ), which is a bit more digestible at a $70 billion market cap.
With either deal, Buffett would likely have to tap the equity markets to raise cash – something he’s generally loath to do. Instead, he might be ready for another Berkshire-focused acquisition that the company would buy on its own with the cash it has.
Buffett loves food-related companies, so I’m betting his next play will be in the similar vein as his last few deals. You can really zero in on the potential Buffett targets by looking at Buffett’s core competencies. He’s vocal about the companies he likes to own, highlighting the fact that he likes simple companies that generate solid returns on equity.
With that, here are three companies that fit Buffett’s bucket list and would allow him to leave a big mark on Berkshire before turning over the reins.
No. 1 Potential Buffett Buy for 2016: General Mills Inc. (NYSE: GIS)
General Mills, with a $38 billion market cap, would be manageable for Buffett. And he has set a new precedent for mega-deals with Berkshire’s buyout of Precision Castparts last year for $37.2 billion – its largest deal ever.
General Mills offers one of the best dividend yields in the consumer foods business – a healthy 2.9% – and it boasts a 12-year streak of consecutive dividend increases.
In terms of the business, it has a solid 30% return on equity. It owns nearly three-quarters of the market share for refrigerated baked goods in the United States, 40% of grain snacks and over 25% of ready-to-eat cereals. Let’s not forget that General Mills also has a trendy segment in the form of its health-conscious Yoplait and Annie’s brands – which could go a long way to modernize the Berkshire portfolio.
No. 2 Potential Buffett Buy for 2016: Kellogg Co. (NYSE: K)
Kellogg is another major player in the cereal and snacks market. With a $26 billion market cap, it would be a slightly smaller pickup compared to General Mills. You’re also getting a little less on the dividend, which yields 2.6%.
But what you are getting is a slightly better deal valuation-wise compared to General Mills, and a company that has the potential for cost cuts. It also has its Pringles potato-chip brand, which it’s expanding worldwide and helps it shift away from the declining cold cereal market. And Kellogg fits the mold in terms of solid return on equity, clocking in at 23% ROE.
No. 3 Potential Buffett Buy for 2016: The Hershey Co. (NYSE: HSY)
Last year I cited Hershey as one of the three companies Buffett should have bought instead of Kraft. I’m once again touting the chocolate and candy maker.
Hershey is the smallest company on our list in terms of market capitalization. With a $20 billion market cap, it would be an easy pickup for Buffett. Shares are up just 5% in the last year, making Hershey a relative underperformer when it comes to food stocks. The return on equity is tops in the market, coming in at 50%. The 2.5% dividend yield is another added bonus.
Hershey owns nearly half the market share for the U.S. chocolate market and is currently in cost-cutting mode. Measures include shrinking its gum presence in stores, as that segment of the market continues to lag. This gives Hershey the opportunity to get back to its core market: chocolate.
Lest we forget, Buffett loves candy, and specifically chocolate. He already owns See’s Candies, and the likes of Hershey bars and Reese’s Peanut Butter Cups would fit into the Berkshire suite of companies nicely.
Ultimately, trying to figure out exactly what Buffett will buy and when is fruitless. A much better strategy is to focus on Buffett-like companies that will reward you over the long term, regardless of whether Buffett shows up with his checkbook or not. The three above companies have market-leading positions in the food industry, while also paying tasty dividends.
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