What is Warren Buffett up to?

Warren Buffett's Berkshire Hathaway recently disclosed new positions in Chevron (CVX) and Verizon(VZ), neither of which are typical Buffett investments. These new positions added to already established positions in ABBVIE(ABBV) and Merck(MRK). What do these four positions have in common? Answer: they are all investment grade and they all sport dividend yields at least twice that of the bonds issued by those companies. Buffett is old enough to remember when stock yields were always higher than bond yields in the years before 1957 when share prices were significantly undervalued.

My guess is that Buffett thinks the shares are undervalued, but the real reason for his purchases is that these equities are really bond substitutes for his insurance company subsidiaries (See Table 1 below). Simply put Buffett is asking the question would you rather own, for example, Verizon stock yielding 4.57% with upside potential rather than the Verizon 1.75s/31yielding 2.26% to maturity. It is a no brainer and sooner or later pension fund managers will soon wake up to this fact. One more thing, Berkshire Hathaway benefits from a 50% dividends received tax deduction making the dividends even more attractive.

                                                                    Table 1.

                     Dividend Yield and Yield to Maturity for Selected Buffett Stocks

Company     Div. Yield     Bond Yield     Issue             S&P Rating

ABBV            4.82%          2.16%            1.75s/31        BBB+

Chevron         5.04             1.94                2.23s/30        AA-

Merck            3.57              1.80               1.45s/30         AA-

Verizon          4.57              2.26               1.75s/31         BBB+     

Prices as of 3/2/21 close.