On Feb. 14, the management of H.J. Heinz Company (NYSE:HNZ), the specialty ketchup and beans manufacturer, announced that it agreed to be acquired for $28 billion by outside investors, including Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A). The deal is shaping up to be the largest acquisition in the food industry ever. In response to the news, shares jumped 20% to close at $72.50.
Buffett’s acquisition guidelines
Mr. Buffett isn’t looking for a hyper growth machine or for “the next best story.” In that sense, the baked beans-to-ketchup group is a classic Buffett company: steady, predictable growth; small repeatable purchases unaffected by economic cycles or fashion; a wide “moat” to repel rivals in the form of one of the world’s most recognizable brands; and years of emerging market growth to come. For the last five years, earnings growth has averaged 7.1% per year. Not anything particularly exciting, but fairly high and consistent. The stock pays a dividend of 2.83% a year, and it shows an annual dividend growth rate of 6.3% a year.
Sitting on a cash position of $42 billion (and counting…), Berkshire is on the hunt for other lucrative deals, both private and public. Below is a short list of prospective companies to be acquired next by Mr. Buffett.
With 15% annual earnings growth over the last five years and a projected 9.8% for the next five, perhaps McDonald’s Corporation (NYSE:MCD) is a great choice. The current dividend yield is 3.3% and has been increasing at an annual clip of 10%. The company’s growth rate has been 13.9% annually over the last five years. McDonald’s has one of the most recognizable brands in the world. This gives it a vast competitive edge over other competitors in the restaurant business.
Corning Incorporated (NYSE:GLW) is another company that I’m sure Mr. Buffett keeps a file on. The specialty all-glass-related company was founded in 1851, and has since mastered the art and technology of glass making. Corning is extremely dominant in its field with the company controlling nearly 50% of the glass panel market globally, and its name is associated with high-quality products worldwide.
Glass making has some serious barriers to entry as a result of heavy investments associated with plants and equipment. This fact positions Corning in an excellent spot to keep making piles of money from glass and other products. The company’s quarterly revenue growth is 14% year-over-year, and it’s able to maintain a very high gross profit margin of 22% due to market dominance and quality. It’s now trading on the cheap at a forward P/E of only 10.