For more than 125 years, the Dow Jones Industrial Average (DJINDICES:^DJI) has been one of the most widely followed stock indexes in the world. Though far from perfect — it’s a price-weighted index instead of market cap-weighted — the Dow Jones is comprised of 30 time-tested and successful multinational companies that have helped lead it higher.
Given the long-tenured success of its components, we shouldn’t be surprised to see billionaire money managers putting their money to work in Dow components. In particular, billionaires can’t stop buying the following four Dow stocks, based on Form 13F filings with the Securities and Exchange Commission for the first quarter.
Last week, Microsoft (NASDAQ:MSFT) entered a very exclusive club: It became only the second publicly traded company to surpass a $2 trillion market cap, along with Apple. But its rising valuation hasn’t deterred billionaires. Larry Fink’s BlackRock, Chase Coleman’s Tiger Global Management, and Jeff Yass’s Susquehanna International respectively scooped up 3.14 million shares, 1.83 million shares, and 1.81 million shares in the first quarter. For Susquehanna, it more than doubled the company’s previous stake.
The fascination with Microsoft boils down to three factors. First, there’s a lot of excitement surrounding Old Softy’s push into the cloud. Cloud infrastructure service Azure grew sales by 50% in the March-ended quarter, with most of the company’s other cloud-based segments (Office commercial, Dynamics, and Windows) increasing their sales by double-digits.
Second, Microsoft’s legacy operations are still cash cows. Even though Windows and Office aren’t the insane growth stories they once were, Windows remains the dominant operating platform for PCs. These may be slower-growing segments, but the margins remain robust.
Third and finally, Microsoft’s large cash pile and abundant cash flow afford it the opportunity to lean on inorganic growth opportunities. Though not all acquisitions will be winners, a few home runs is all it takes for Microsoft to keep up its double-digit growth rate.
Walgreens Boots Alliance
Another Dow stock that has the full attention of billionaire money managers is pharmacy chain Walgreens Boots Alliance (NASDAQ:WBA). The company with the smallest influence within the Dow saw BlackRock buy 6.91 million shares in Q1 2021. Additionally, Ole Andreas Havlorsen’s Viking Global added 1.72 million shares, while Jim Simons’ Renaissance Technologies added 211,000 shares.
Why Walgreens? The answer is that we’re on the cusp of seeing the company’s multipoint turnaround plan take shape. Management expects more than $2 billion in annual cost savings by fiscal 2022, but has also been aggressively reinvesting in digitization efforts. A beefed up online presence has an opportunity to really jump-start Walgreens’ top-line growth.
Perhaps more exciting is Walgreens partnering up with VillageMD. The duo aims to open up to 700 full-service clinics throughout the United States. Whereas most health clinics inside pharmacy chains can’t handle more than a vaccine or sniffle, Walgreens’ focus on full-service treatment is aimed at drawing in patients with chronic illnesses. Let’s not forget that Walgreens’ pharmacy is its top-tier margin driver. This partnership should help improve brand loyalty and could funnel more prescriptions to its pharmacies.
Furthermore, Walgreens remains relatively inexpensive. Despite the S&P 500‘s Shiller price-to-earnings ratio nearing a two-decade high, shares of Walgreens Boots Alliance can be nabbed for a very reasonable 10 times Wall Street’s consensus earnings for next year.
Given its nearly decade-long underperformance, this may come a shock, but IBM (NYSE:IBM) — yes, IBM — has been an extremely popular buy among billionaire money managers. BlackRock, Renaissance Technologies, Susquehanna, and Ken Griffin’s Citadel Advisors, respectively purchased 2.01 million shares, 1.11 million shares, 147,000 shares, and 198,000 shares during the first quarter.
For years, the issue with IBM was its delayed entrance into cloud computing. Relying on hardware and static software was highly profitable for a long time. But beginning in the early 2010s, it became a drag for Big Blue, leading to a multiyear sales decline. The good news is that, through internal innovation and a series of acquisitions, IBM’s growth engine looks to be headed in the right direction, once again.
With a renewed focus on hybrid cloud services, IBM has an opportunity to become a major player in big-data processing. Its hybrid cloud solutions are also particularly useful in a work environment that’s become increasingly mobile and remote. During the March-ended quarter, IBM’s cloud revenue jumped 21% from the prior-year period, and it accounted for 37% of total sales.
Another factor that tends to get overlooked is IBM has done an excellent job of tapering expenses at its legacy operations to preserve margins and cash flow. Though these are generally stagnant operating segments, margins have been flat or rising. This gives IBM more capital to make acquisitions and pay its juicy 4.5% dividend yield.
The final Dow stock billionaire money managers can’t stop buying is arguably the least volatile component within the iconic index: Verizon (NYSE:VZ). During the first quarter, Warren Buffett’s Berkshire Hathaway gobbled up 12.11 million shares, BlackRock added 6.62 million shares, and Susquehanna almost tripled its stake by purchasing 3.36 million shares.
The reason billionaires are buying likely boils down to two factors. First, Verizon may well be the safest high-yield dividend stock on the planet. The wireless services it provides generates highly predictable cash flow. With minimal volatility and a 4.5% yield, it appears to be a far more attractive place for institutional investors to park their cash than just leaving it under the proverbial mattress.
The other factor here is that Verizon does have two organic growth catalysts working in its favor. The bigger of the two is the ongoing rollout of 5G wireless infrastructure. It’s been a decade since wireless download speeds have improved, which means we should see a multiyear tech upgrade cycle for businesses and consumers. Because Verizon generates healthy margins from wireless data consumption, its investments in 5G should pay off handsomely.
Verizon also acquired 5G midband spectrum that’ll it be using to grow its in-home broadband offerings. By 2023, the company is aiming for 30 million residential broadband customers.
Verizon will never be the growth stock it once was, but it has one of the safest floors of any publicly traded company.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.