Few investors garner Wall Street’s undivided attention quite like Warren Buffett. That’s because the Oracle of Omaha has crushed the broad-market indexes since becoming CEO of Berkshire Hathaway (BRK.A) (BRK.B) 58 years ago. In terms of aggregate return, Berkshire Hathaway’s Class A shares (BRK.A) increased by 3,787,464%, through Dec. 31, 2022, 153 times greater than the total return, including dividends paid, of the S&P 500 over the same time frame.
Even though Buffett and his investing team have had their fair share of investing mistakes over nearly six decades, the Oracle of Omaha’s long-term focus, portfolio concentration, and love of dividend stocks have helped produce these phenomenal returns.
For many investors, the big question is: What’s Buffett buying now/next?
Buffett and his team have been relatively steady buyers of equities
Thanks to required Form 13F filings with the Securities and Exchange Commission (SEC), investors can track what stocks Buffett’s company is buying and selling. Putting aside the tepid buying activity observed during the fourth quarter of 2022, Buffett and his team have put tens of billions of dollars to work in Berkshire’s nearly $340 billion investment portfolio.
For example, Warren Buffett and his investing lieutenants, Todd Combs and Ted Weschler, have purchased an estimated $34 billion worth of Apple (AAPL) stock since the first quarter of 2016. While Buffett does love portfolio concentration, it’s not like him to invest $34 billion in any single business unless he’s absolutely enamored with the operating model and management team. Apple certainly checks those boxes.
Over the trailing-12-month period, Apple generated in excess of $109 billion in operating cash flow. That’s a reflection of its ongoing physical product and subscription services innovation, as well as its exceptionally loyal customer base.
Warren Buffett also has to be pleased that Berkshire Hathaway’s stake in Apple keeps climbing. Since the beginning of 2013, Apple has repurchased more than $550 billion of its stock. That’s more than the value of nearly 99% of all S&P 500 companies.
We’ve seen Buffett and his lieutenants put plenty of capital to work in the energy sector, too. Approximately 211.7 million shares of Occidental Petroleum (OXY) have been purchased by Berkshire Hathaway since 2022 began, while over 167 million shares of Chevron (CVX) have been bought since the beginning of the fourth quarter of 2020.
These sizable investments in big oil are likely premised on the idea that the global energy supply chain remains broken. Three years of underinvestment by global energy majors during the COVID-19 pandemic, topped off by Russia’s invasions of Ukraine, makes it difficult for the supply of energy commodities to be meaningfully increased anytime soon. If demand for fossil fuels continues to steadily climb throughout the decade, the drilling segments for Occidental Petroleum and Chevron should benefit immensely.
Warren Buffett plowed $66 billion into one stock in less than five years
Although Apple, Occidental Petroleum, and Chevron represent some of Berkshire Hathaway’s most prominent holdings, they’ve all played second fiddle to a stock that Warren Buffett has purchased every single quarter, starting with the third quarter of 2018. Buffett has bought $66 billion worth of this stock in less than five years.
To put this into some context, 500 companies make up the market cap-weighted S&P 500. Out of those 500 companies, 385 (77%) ended last week with a market cap of less than $66 billion. Warren Buffett and his investment team could have purchased any one of these 385 S&P 500 companies but chose instead to pile $66 billion into one special stock.
However, there’s a very good reason Buffett chose this path: The company he and executive vice chairman Charlie Munger OK’d buying $66 billion shares of since mid-2018 was their own.
On July 17, 2018, Berkshire Hathaway’s board reworked the criteria governing share buybacks. Before this, share buybacks could be undertaken only if Berkshire Hathaway’s stock fell to or below 120% of book value (i.e., no more than 20% above book value). For more than a half decade leading up to this July 2018 change, Berkshire’s stock never fell to or below this threshold.
The new criteria allowed Buffett and Munger to repurchase Berkshire stock without any restrictions, as long as they agreed it was intrinsically cheap and the company had at least $30 billion in cash, cash equivalents, and U.S. Treasuries in its coffers.
Among the many tools at Warren Buffett’s disposal, share buybacks are one of his favorite ways to give back to Berkshire’s investors. Repurchasing stock lowers the number of outstanding shares, which thereby increases the ownership stakes of existing shareholders.
Additionally, lowering Berkshire Hathaway’s outstanding share count through buybacks provides a boost to earnings per share. Share repurchases can be particularly rewarding for businesses like Berkshire Hathaway that tend to deliver steady or growing net income (sans unrealized investment gain/loss fluctuations).
This $66 billion investment is also a very clear message from Warren Buffett that he’s confident in Berkshire Hathaway’s long-term positioning. The Oracle of Omaha and his team have crammed their company’s investment portfolio with cyclical businesses. Since economic expansions last considerably longer than recessions, this smart long-term bet should pay off handsomely for Berkshire Hathaway’s patient shareholders.
— Sean Williams
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Source: The Motley Fool