Investors can get a glimpse of some of the biggest investors' portfolios when 13-F SEC filings are released four times per year, and no other 13-F is scrutinized nearly as closely as that of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). It comes with the territory when Warren Buffett, roundly considered the best investor in history, has managed your portfolio for a half-century.
While the bulk of the Berkshire stock portfolio doesn't change from quarter to quarter, it's always interesting to see where Buffett and Berkshire's other portfolio managers see opportunity. Moreover, with the market regularly approaching all-time highs, it's also worth looking at what Buffett and his lieutenants are selling.
Since the beginning of 2018, one stock in particular has been on the outs for the Oracle of Omaha every quarter: Phillips 66 (NYSE:PSX). So why has Buffett been steadily selling off Berkshire's stake in this oil refining and infrastructure giant? Let's take a closer look at this question and see whether investors should follow suit.
Once a top holding, now near the bottom of the list
Berkshire has owned a stake in Phillips 66 going back to its 2012 split from ConocoPhillips. Over the years, that investment generally grew, peaking in the first quarter of 2017 -- barely two years ago -- at almost 81 million shares of the company. At the time that stake was worth $6.4 billion, making it the seventh-biggest investment in the Berkshire portfolio and worth almost 16% of Phillips 66. By far, Berkshire was Phillips 66's biggest investor.
But in the first quarter of 2018, things began to change. Berkshire sold off 35 million shares of the company, cutting its stake by 35%, and has sold off more shares with every passing quarter. At the end of this year's first quarter, Berkshire's stake in Phillips 66 had shrunk to 5.5 million shares, and is now smaller than 37 of Berkshire's other investments.
Why all the selling?
Buffett has never been one to explain why Berkshire owns a particular stock, but there are some conclusions investors can reach behind the steady selling of Phillips 66.
On one hand, there's little evidence to suggest that Buffett has ever considered it to be the kind of cornerstone, "own forever" stock that sits at the heart of the Berkshire portfolio. After all, Buffett himself has reminded investors that he said, "our favorite holding period is forever," not Berkshire's only holding period.
While oil and refined-products demand is relatively steady over time, refining profits can swing with changes in oil prices, particularly the difference between Brent crude -- which is an important benchmark in setting gas, diesel, and jet fuel prices -- and other, cheaper crudes it can buy and refine. For this reason, it's possible Buffett has viewed Phillips 66 as the excellent business that it is, but as a stock that's best bought when the cycle is down, and sold when the cycle -- and profits -- are up.
Here's how that's played out since the end of Q1 2017, when Berkshire started selling Phillips 66 shares:
Warren Buffett the trader? There's no doubt that Berkshire certainly was selling at the right time; WhaleWisdom estimates Berkshire paid about $76.40 per share on average, meaning it profited handsomely for every share it sold the past two years, and now holds a small stake while Phillips 66's stock price sits near its lowest price since mid-2017. But I don't think the gradual selling is so much about trading as it is about managing Berkshire's tax implications, which can be better accomplished by gradual selling of the position. By selling a bit at a time, Buffett is better able to minimize the capital gains tax from the big profits it realized by selling Phillips 66 shares, by leveraging net operating losses from Berkshire subsidiaries to counteract the gain.
More recently, Berkshire's pending $10 billion deal with Occidental Petroleum (NYSE:OXY) may have accelerated the selling of its stake in Phillips 66. Berkshire's investment in preferred stock will pay it a whopping $800 million per year in dividends. That's an 8% yield, far better than the 3.8% yield Phillips 66 shares pay at recent prices.
What should you do?
Frankly, investors should take my analysis with a grain of salt; there's a lot of speculation about what I think Buffett is thinking, and chances are, it's only partly right. Moreover, Buffett's reasons -- particularly as they relate to managing Berkshire's portfolio mix and capital -- have exactly zero to do with what you should or shouldn't buy.
Moreover, Buffett has lauded Phillips 66 and its management in the past as being excellent at what they do. Frankly, it wouldn't shock me in the least to see Berkshire make a play to buy the entire company at the right price; owning such a steady, cash-cow business with strong competitive advantages is about as Buffett a move as there is. Besides, it's not as if you or I even have the option to buy a stake in Occidental Petroleum that pays an 8% yield.
Frankly, instead of following Buffett out of Phillips 66, I think many investors should consider buying. Its nearly 3.8% dividend yield is about the highest it's ever been, and the payout is up almost 190% since the first payout in 2013. I expect plenty of future increases, and few management teams have demonstrated the capital allocation chops this one has over the past decade.
We can't all get access to the kinds of deals Berkshire can, and there's no doubt Buffett has found an excellent one with Occidental. But don't make the mistake of overlooking a good opportunity like Phillips 66, just because Berkshire recently sold.