There's little doubt that Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.10%) CEO Warren Buffett is one of the greatest investors of all time. Since taking over as CEO in 1965, he's created over $500 billion in value for shareholders and generated an average annual return for Berkshire Hathaway's shares of 20%. That's an aggregate return of more than 2,800,000%, through Dec. 31, 2020, for those of you keeping score at home.
With a track record like this, it shouldn't surprise anyone that Wall Street and investors eagerly await the Oracle of Omaha's 13F filings with the Securities and Exchange Commission. A 13F provides a quarterly snapshot of what Buffett and his investing team have been buying and selling.
After adjusting for Buffett's buys and sells in the second quarter, one thing is plainly evident: The Oracle of Omaha doesn't believe in diversification, if you know what you're doing. Just four stocks in Berkshire Hathaway's portfolio accounted for 70% of its $316 billion in invested assets, as of this past weekend.
Apple: 42.5% of invested assets ($134,491,280,983)
Innovation kingpin Apple (AAPL -0.34%) is often referred to by Warren Buffett as "Berkshire's third business." That statement makes even more sense when you realize that Berkshire's stake in Apple is worth a jaw-dropping $134.5 billion and makes up a little over 42% of his company's portfolio.
One reason Apple is such an overwhelmingly successful company is its branding. Every time a new product comes out, you'll see brand loyalty kick in and customer lines wrap around its stores. According to a study from Visual Capitalist, Apple is the most valuable global brand, and no other company even comes close.
Apple is also benefiting immensely from the shift to 5G, as well as its ongoing push into subscription services. Over the past nine months, Apple has rung up $153.1 billion in iPhone sales, which is a whopping 38% improvement over iPhone sales in the comparable period a year ago.
Service revenue also hit a record of $50.1 billion through nine months of fiscal 2021, representing a year-over-year increase of 28%. Since service revenue offers considerably higher and more consistent margins than product sales, Apple's already insane operating cash flow should expand further in the years to come.
To round out this story, Apple delivers for its shareholders. Its dividend has grown by 132% since it was reinstated in 2012, and the company is averaging $15.7 billion in quarterly share buybacks over the past five years. It's the perfect Buffett stock in every way.
Bank of America: 13.2% of invested assets ($41,696,235,482)
Even though Apple is Berkshire's unquestioned largest holding, Buffett's favorite place to put his company's money to work is bank stocks. And there's no bank stock he fancies more than Bank of America (BAC -1.29%).
Generally speaking, the Oracle of Omaha loves cyclical companies. He fully understand that while recessions are inevitable, they usually only last a couple of months to a few quarters. By comparison, periods of economic expansion often last years, or perhaps even a decade. Bank stocks like BofA are perfectly positioned to benefit from these long-winded expansions.
Bank of America is also the most interest-sensitive of the money-center banks. In the company's latest quarterly presentation, BofA notes that a parallel shift in the interest rate yield curve of 100 basis points would generate an estimated $8 billion in added net interest income over the next 12 months. Since this income would be based on existing loans, it would effectively go straight to its bottom line. When the Federal Reserve inevitably does raise rates, Bank of America will a top beneficiary.
And don't overlook BofA's improved digital engagement trends, either. With more of its customers shifting their banking transactions online or to mobile, BofA has been able to consolidate some of its branches and lowered its noninterest expenses.
With a rich history of dividend payments and share buybacks, Bank of America should be a longtime holding of Berkshire Hathaway.
American Express: 7.6% of invested assets ($24,219,809,325)
Credit services giant American Express (AXP -0.48%) is the third longest-tenured holding in Berkshire Hathaway's portfolio, and also one of Buffett's best long-term investments. AmEx was initially added in 1993, and it carries a cost basis of $8.49 a share. Not too shabby, considering that it closed this past week at almost $160 a share.
The buy thesis behind American Express is very similar to that of bank stocks. The length of economic expansions is disproportionately longer than contractions and recessions. This means a company like AmEx, which benefits from an increased number of merchant transactions and rising spending activity, will thrive as the U.S. and global economy expands.
Of course, American Express has another trick up its sleeve. It's always had a knack for attracting affluent clientele. Well-to-do individuals are far less likely to adjust their spending habits if a minor economic contraction arises. This means less likelihood of delinquent credit accounts and a quicker rebound from economic slowdowns for American Express, compared to many of its peers.
Not to sound like a broken record, but American Express also parses out what's become a sizable dividend for Berkshire Hathaway. Even though AmEx is only yielding 1.1%, its base annual payout of $1.72 equates to a 20.3% yield, based on Berkshire's initial cost basis.
Coca-Cola: 7.2% of invested assets ($22,656,000,000)
Similar to Apple, Buffett likely values Coca-Cola for its geographic reach and exceptional branding. Coke sells its products in all but two countries worldwide (North Korea and Cuba), and it has more than 20 beverage brands bringing in at least $1 billion in annual sales. Further, it controls 20% of the cold beverage market in developed markets, which provides highly predictable cash flow, and it holds a 10% share of cold beverages sold in emerging markets, which is where the company can exact higher growth potential moving forward.
It's also one of the most-recognized brands in the world. Coke has unleashed its omnichannel presence by utilizing social media and leaning on well-known brand ambassadors to engage with multiple generations of consumers.
But what Buffett might like best about Coca-Cola is the insane dividend his company receives annually. On the surface, Coke's base annual payout of $1.68 doesn't look at that impressive. But when you factor in that Berkshire's cost basis is about $3.25 a share, the Oracle of Omaha's yield on cost is closer to 52%! In other words, Buffett is doubling his initial investment in Coca-Cola every two years, thanks solely to the dividend.