Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett has a way of captivating an audience. Since hosting Berkshire’s first annual shareholder meeting in the cafeteria of an owned subsidiary in 1973, which drew a few dozen shareholders, the chance to hear the Oracle of Omaha speak now draws well over 30,000 shareholders and investors to Omaha, Nebraska every year.

Riding Warren Buffett’s coattails has been exceptionally profitable for those with long-term mindsets. He’s overseen an average annual return of 19.8% for his company’s Class A shares (BRK.A) since the mid-1960s (through the end of 2022), which perfectly doubles the annualized total return of the S&P 500 (9.9%) over the same time frame.

Riding Warren Buffett’s coattails has been a moneymaking strategy for more than a half-century
Thanks to required Form 13F filings with the Securities and Exchange Commission, mirroring Warren Buffett’s buying and selling activity has been made easy.

For example, following the Oracle of Omaha into tech stock Apple (AAPL) has been a fruitful venture for investors. Considering that Buffett referred to Apple as “a better business than any we own” during Berkshire Hathaway’s 2023 annual shareholder meeting, it should come as little surprise that he and his investing team have 47% of Berkshire’s $381 billion of invested assets tied up in Apple stock.

Although Apple’s extremely loyal customer base was built from its physical product innovation (iPhone, iPad, and Mac), the company’s future relies on pivoting to a subscription-based platform. CEO Tim Cook is overseeing this transition, which should lead to a higher operating margin over time, as well as smooth out some of the revenue vacillations Apple deals with during major product-replacement cycles.

Warren Buffett is also a huge fan of Apple’s capital-return program, which is arguably tops on Wall Street. In addition to returning more than $15 billion a year to its shareholders via dividends, Apple’s board has OK’d a cumulative $586 billion worth of share buybacks over the past 10 years. The Oracle of Omaha appreciates businesses that increase Berkshire Hathaway’s ownership stake without him having to lift a finger.

Even though Apple’s stock is pricier than it’s been in more than a decade, Buffett and his team have continued adding to this core position.

Another stock we’ve watched Warren Buffett purchase with regularity over the past five quarters is Occidental Petroleum (OXY). Although the Oracle of Omaha and his investing lieutenants, Ted Weschler and Todd Combs, have historically never been big on energy stocks, they’ve absolutely piled into shares of Occidental since the start of 2022 — 224.1 million shares and counting.

Investing aggressively in oil stocks likely signals that Berkshire Hathaway’s top minds believe the price of energy commodities will remain elevated. A tight oil supply market certainly backs up this premise.

More than three years of capital underinvestment caused by the COVID-19 pandemic, coupled with Russia’s war with Ukraine, creates tangible global supply concerns for oil. That looks like a recipe for a higher spot price.

Even though Occidental Petroleum is an integrated operator — i.e., in addition to drilling, it also operates downstream assets, such as chemical plants — it generates the bulk of its revenue from drilling. In other words, its operating cash flow is more levered to movements in the spot price of crude oil.

Buffett has purchased shares of this stock every single quarter since July 2018
While Warren Buffett clearly has his favorites in Berkshire Hathaway’s portfolio, the stock he’s been buying hand over fist doesn’t actually show up in his company’s quarterly 13F filings.

There’s only one stock that the Oracle of Omaha has bought, without fail, for 19 consecutive quarters (Q3 2018 through Q1 2023), and the only way to discover this buying activity is to review Berkshire Hathaway’s quarterly operating results. The company in question that Buffett can’t stop buying is (cue the dramatic music)… Berkshire Hathaway.

Prior to the midpoint of July 2018, Berkshire Hathaway’s share repurchase program had well-defined parameters. Buffett and his team were only allowed to buy back Berkshire stock if the company’s shares traded at or below 120% of book value. At no point in the more than half-decade leading up to mid-July 2018 did Berkshire’s stock hit this level, which resulted in no buybacks being undertaken.

Things changed in a meaningful way for Berkshire’s dynamic duo — Warren Buffett and executive vice chairman Charlie Munger — on July 17, 2018. That’s the date the company’s board OK’d two criteria that would allow Buffett and Munger more freedom to repurchase shares of their company’s stock.

As long as Berkshire Hathaway has at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet, and Warren Buffett and Charlie Munger agree that Berkshire stock is trading below its intrinsic value, buybacks can be made without a ceiling.

Although we won’t find out if Berkshire’s brightest investment minds repurchased additional shares in the June-ended quarter until the company reports its second-quarter operating results, we do know that over $70 billion worth of Berkshire stock has been bought back since July 2018. Not a single quarter has gone by in the past 19 where buybacks weren’t undertaken.

Just as the Oracle of Omaha appreciates when Berkshire’s investment stake in a company grows due to share buybacks, Buffett appears to want to return the favor to his shareholders. Repurchasing Berkshire Hathaway stock on a regular basis makes each remaining share scarcer.

Share buybacks can also reduce a company’s outstanding share count over time. For businesses with steady or growing net income, such as Berkshire Hathaway, fewer shares outstanding can lead to an increase in earnings per share. In other words, buybacks are making Berkshire even more fundamentally attractive to investors.

It’s also possible that Berkshire Hathaway’s aggressive share repurchase program is a reflection of Warren Buffett’s confidence in his company’s long-term growth strategy.

Buffett and his lieutenants tend to gravitate to cyclical businesses. Cyclical companies ebb and flow with the health of the U.S. economy. Although recessions are a natural part of the economic cycle, all 12 recessions after World War II have lasted just two to 18 months. Since periods of expansion last considerably longer, packing Berkshire’s investment portfolio (and fully owned assets) with cyclical businesses should allow the company to steadily grow its bottom line over time.

— Sean Williams

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Source: The Motley Fool