Why did Buffett liquidate dividend stocks JNJ & PG?

Since Buffett acquired $Berkshire Hathaway(BRK.B)$ $Berkshire Hathaway(BRK.A)$ in 1965, the holding company has grown at an average annual rate of 19.8%. The company's position report shows Buffett liquidated two dividend stocks, $Johnson & Johnson(JNJ)$ $Procter & Gamble(PG)$ during the third quarter.

These two dividend stocks have raised their dividends for more than 60 years in a row, and there's nothing wrong with current company fundamentals. So why did Buffett choose this moment to exit J&J and P&G altogether?

1.Johnson & Johnson

Buffett liquidated seven stocks in the third quarter, but the biggest surprise was health care giant Johnson & Johnson. The company has raised its dividend for the 61st year in a row, now yielding 3%, but that didn't stop Buffett from selling all of his 327,100 shares in the third quarter. Buffett didn't say why, but it's likely related to the company's recent spin-off of Kenvue.

In August this year, Johnson & Johnson completed the spin-off of its consumer products business and formed a new company, Kenvue. At this point, the investment logic of the stock is no longer well-known consumer brands such as Listerine, Tylenol and Bondi, but more dependent on its pharmaceutical and medical technology businesses.

We all know that Buffett and Berkshire's investment philosophy is: Don't invest if you don't understand. Medical technology is not easy to understand, and biopharmaceuticals are even more complicated. From this perspective, Berkshire's liquidation of J&J shares also seems to make sense.

It's important to note, though, that Buffett's liquidation doesn't mean there's anything wrong with J&J stock. Excluding the impact of foreign exchange, sales in the company's medical technology business rose 10.4% year over year.

The pharmaceutical business, which accounts for 65% of revenue, saw a 4.4% year-on-year increase in sales despite the rapid decline in COVID-19 sales. In addition, the company recently submitted a marketing application for a new lung cancer drug, lazertinib.

In a pivotal trial, the lazertinib+Rybrevant combination significantly outperformed $AstraZeneca PLC(AZN)$ blockbuster Tagrisso ($5.9 billion in annual sales).

2.Proctor & Gamble

Berkshire sold 315,400 shares of P&G in the third quarter. The consumer goods company has a better dividend history than Johnson & Johnson, having paid a dividend every year since 1890 and announcing in April a 67th consecutive dividend increase to 2.6%. P&g has grown its dividend by 31% over the past five years, with growth likely to slow over the next five years as interest expenses rise.

P&G's $14.6 billion in free cash flow over the past year and 62% of committed dividends mean the company is making enough money to pay down debt and continue to grow its dividend.

The stock's earnings may not be outstanding but steady. Thanks to the pricing power provided by well-known brands including Crest, Tide and Pampers, the company managed to raise prices by 7% in its fiscal third quarter, which ended Sept. 30, while sales fell just 1% in the same period.