Last week’s news that ketchup giant H.J. Heinz will acquire Kraft Foods (NasdaqGS: KRFT), creating the fifth-largest food company in the world, has Warren Buffett’s deal-making acumen in the spotlight once again.
Heinz was acquired by Brazilian private equity firm 3G Capital and Buffett’s Berkshire Hathaway (NYSE: BRK-A) in 2013. Berkshire and 3G will fund a $10 billion special dividend to Kraft shareholders as part of the merger, which was initially valued at $36 billion.
That is a big sum, but it does not mean Berkshire is done hunting for the elephants (big acquisitions) Buffett prizes. The next apple of Buffett’s acquisition eye is pure speculation at this point, but there are plenty of exchange traded funds that hold companies Berkshire could find appealing. [Niche ETFs Get a Lift From Kraft Takeover]
Using Berkshire’s acquisition criteria, the WisdomTree U.S. Dividend Growth Fund (NasdaqGM: DGRW) fits the bill as an ETF that is home companies that could pass Berkshire’s requirements as potential takeover targets. Those requirements include prosaic business models, steady management, consistent and predictable earnings and robust pre-tax earnings.
DGRW tracks the WisdomTree U.S. Dividend Growth Index (WTDGI), which evaluates companies based on earnings quality, return on assets and return on equity. From Nov. 30, 2013 to Nov. 30, 2014, the WisdomTree U.S. Dividend Growth Index saw dividend growth of 10.1%, according to WisdomTree data.
DGRW, which has a distribution yield of 2.45% and $443.3 million in assets under management, has a 1.35% stake in Kraft and is home to several other companies that Berkshire currently holds equity stakes in, including International Business Machines (NYES: IBM), General Motors (NYSE: GM), Costco (NasdaqGS: COST) and MasterCard (NYSE: MA). [Access Apple’s Dividend Growth With This ETF]
That is to say some big companies are found among the nearly 300 held by DGRW. The combined market value of the components in DGRW’s underlying index is $8.54 trillion. While that may diminish the chances of an imminent Berkshire takeover of a DGRW holding, the ETF is home to some companies Buffett has been tied to (albeit via rumor) in the past, including Hershey (NYSE: HSY).
When it comes to DGRW and any company Buffett may be interested in, it pays to remember the importance of low debt firms with high returns on equity.
“The key phrase I’m focused on is “businesses earning good returns on equity while employing little or no debt.” I liked this phrase particularly because WisdomTree offers a series of Indexes—our “Dividend Growth” family—that employs this “Buffett factor” of return on equity (ROE) and return on assets (ROA) as a driving force for stock selection. The reason we included ROA in powering stock selection is that it penalizes the use of debt (leverage) in delivering ROE; therefore, the resulting list of companies that qualify for our Indexes tend to also employ little debt,” said WisdomTree Research Director Jeremy Schwartz in a recent note.
Low debt is trait often linked with another prized characteristic: Massive cash hoards. DGRW has that, too, as Apple (NasdaqGS: AAPL) and Microsoft (NasdaqGS: MSFT), the ETF’s second- and third-largest holdings, have two of the largest war chests in the world.
WisdomTree U.S. Dividend Growth Fund
Tom Lydon’s clients own shares of Apple. Todd Shriber owns shares of DGRW.