(07/25/14) Tortoise Trio: Slow and Steady

Companies in our Tortoise Portfolio tend to be mature, relatively slow-growing, and have moderate to low risk; here’s a look at three favorite ideas in the portfolio, suggests Matthew Coffina of Morningstar FundInvestor.

Berkshire Hathaway (BRK-B)

Berkshire seems to be persistently undervalued, perhaps because of investors’ aversion to conglomerates or concerns about Warren Buffett’s longevity.

On the first point, I like the safety that comes from such broad diversification, and Berkshire has a unique ability to redirect capital from subsidiaries with deteriorating competitive positions to those with expanding moats.

On the second point, between decentralized management and a detailed succession plan, I doubt there will be a major shift in strategy when Buffett is gone.

Our $150 fair value estimate is based entirely on the value of Berkshire’s existing subsidiaries. While I think management will continue to create value through new investments, this isn’t necessary for Berkshire to be a worthwhile holding. The stock remains a top pick for new money.

Philip Morris International (PM)

This year and last have been some of the toughest in Philip Morris’ long history because of increasing regulation, growth in illicit trade, competitive challenges, economic weakness in key markets, and severe currency headwinds.

Volumes will probably shrink going forward, and there’s no doubt that PM’s growth profile is now more Tortoise than Hare.

However, Philip Morris also enjoys incredible pricing power and abundant free cash flows, which should keep the dividend safe and growing.

Thanks to a 4.5% yield and mid- to high-single-digit EPS growth, annual total returns of 10% or better still seem likely. This is another favorite for new money.

Enterprise Products Partners (EPD)

Enterprise has capitalized on the boom in domestic oil and gas production by building out its integrated network of midstream infrastructure.

However, in contrast to most peers, Enterprise hasn’t accelerated distribution growth to match cash flow growth—instead choosing to retain excess cash for reinvestment.

This has enabled Enterprise’s distribution coverage ratio to reach about 1.6, which is almost unheard of for a master limited partnership.

Enterprise now has one of the safest distributions in the industry, and it should be able to sustain 6% annual distribution hikes for a long time to come.

This is just the kind of conservatism and long-term focus I prize in the Tortoise, and I would jump at the chance to add to our stake even at a modest discount to Morningstar’s fair value estimate.