If you've ever wondered why the Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) annual shareholder meeting creates such a buzz, take a closer look at how well the company has performed since Warren Buffett took the reins.
According to the company's 2020 shareholder letter, Berkshire Hathaway has averaged a 20% compounded annual return since 1965. Between 1964 and 2020, Buffett's company nearly outperformed the benchmark S&P 500 by 2,800,000%. I'd say that's a pretty good reason to pay attention when Warren Buffett and his right-hand man Charlie Munger speak.
If you need more proof of Buffett's success, look closer at Berkshire Hathaway's investment portfolio. The combined $108.6 billion the Oracle of Omaha and his team have invested over the years and decades is now worth $304.7 billion.
Most intriguing of all, $157.8 billion (80%) of this $196.1 billion in unrealized gains have come from just four stocks.
Apple: $88.2 billion in unrealized gains
Almost 45% of Berkshire Hathaway's unrealized gains derive from tech kingpin Apple (NASDAQ:AAPL), which Buffett has affably referred to as his company's "third business." The $31.1 billion cost basis for more than 907 million Apple shares has turned into a market value of $119.3 billion, as of this past weekend.
Apple has become a dual threat juggernaut. It's long been a products company, but under the leadership of CEO Tim Cook is focusing on platforms for the future. In its latest quarter, services revenue once again grew by a double-digit percentage. Through the first six months of the current fiscal year, more than 15% of sales have come from high-margin services.
Then again, it's not as if Apple has abandoned its bread-and-butter products. Since unveiling its first 5G-capable iPhones, sales of the devices have skyrocketed. In six months, the company has recognized $113.5 billion just from iPhone sales. Every other category -- Mac, iPad, and wearables -- is up by a double-digit percentage through six months, too.
Beyond its incredible innovation and execution, Buffett is also a big fan of Apple's capital return program. The company recently announced a $90 billion share buyback, and it pays one of the largest nominal dividends of any public company. There's simply no reason for Buffett to sell his stake.
Bank of America: $27.3 billion in unrealized gains
It's no secret that bank stocks are Warren Buffett's favorite place to park his company's money. Standing alone at the top of the pack among bank stocks is Bank of America (NYSE:BAC). With a cost basis of $14.6 billion and a market value of $41.9 billion, as of this past weekend, Buffett and his team are up a solid $27.3 billion on their position.
The reason the Oracle of Omaha fancies banks so much is that they're long-term moneymakers. Even though recessions are an inevitable part of the economic cycle, periods of contraction in the U.S. economy are typically short-lived. By comparison, economic expansions often last for years. Bank stocks like BofA bide their time during recessions, then bask in growth from multiple revenue channels (retail and commercial banking, and wealth/investment management) when the economy is firing on all cylinders.
One of the biggest catalysts for Bank of America will be its interest rate sensitivity. When the yield curve steepens and the Federal Reserve eventually tightens its stance on lending to keep the U.S. economy from overheating, BofA is going to be the prime beneficiary of higher rates. In short, its interest income should rocket higher.
What's more, Bank of America has done a fantastic job of investing in digital banking initiatives and consolidating some of its branches to reduce noninterest expenses. As we move toward a more digital banking experience, BofA stands ready to capitalize on the potential for higher margins.
American Express: $22 billion in unrealized gains
Financial services company American Express (NYSE:AXP) is one of Buffett's longest-tenured holdings. Since buying AmEx in 1993, the Oracle of Omaha's investment has blossomed from a cost basis of $1.3 billion to $23.3 billion.
Similar to Bank of America and other bank stocks, American Express is a cyclical business. It struggles a bit when recessions arise, but basks in multiyear economic expansions. Investors with the patience to hang on for long periods of time ae often handsomely rewarded. In Buffett's case, the dividend American Express pays out annually equates to a 20% yield relative to Berkshire Hathaway's cost basis.
Aside from being cyclical, AmEx has two other tricks up its sleeve that contribute to its success. First, it's what I like to call a double dipper. In addition to collecting processing fees from merchants, American Express is also a lender via personal and business credit cards. This allows it to generate interest income and fees during those multiyear bull markets.
Second, AmEx has a knack for targeting affluent clientele with its credit accounts. The well-to-do are less inclined to change their spending habits during minor economic disruptions. This implies a lower likelihood of credit delinquencies, relative to the average consumer, and more predictable income.
Coca-Cola: $20.3 billion in unrealized gains
Rounding out the quartet is beverage behemoth Coca-Cola (NYSE:KO). Berkshire Hathaway's longest-tenured holding at 33 years was purchased for a grand total of $1.3 billion and has a market value of $21.6 billion, as of this past weekend. Not a shabby return.
If you though the 20% yield on cost from AmEx was impressive, wait till you get a closer look at Coca-Cola. The company's $1.68 base annual payout works out to a 52% yield on cost compared to the split-adjusted $3.25 per share Buffett paid for each share of Coke in 1988. Suffice it to say that Buffett has no incentive to sell when his company's initial investment is doubling every two years from the dividend income alone.
What's made Coca-Cola such a fantastic business is its geographic diversity and its on-point marketing. In terms of reach, Coke products are sold in every country worldwide, save for two (North Korea and Cuba). It's able to take advantage of predictable demand and cash flow from developed markets, as well as stronger organic growth potential in emerging markets. In total, Coke has more than 20 brands generating at least $1 billion in sales each year.
As for marketing, no consumer-goods brand is more recognized worldwide than Coke. The company has holiday tie-ins within the U.S., is partnering with a handful of well-known brand ambassadors, and has been more than willing to turn to social media to reach prospective product buyers. It's one of those brands that can easily cross generational gaps to engage consumers.