When it comes to investing success, Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) CEO Warren Buffett is, arguably, in a class of his own.
On a personal level, Buffett's net worth has climbed from around $10,000 in the mid-1950s to $114 billion as of this past weekend. Take note that this figure doesn't include the $41 billion he's donated to charitable organizations since 2006.
Perhaps even more impressive, Buffett has led Berkshire Hathaway's Class A shares to an average annual return of more than 20% since taking over as CEO in 1965. On an aggregate basis, we're talking about more than $700 billion in value creation for shareholders (a group that includes Buffett), and a return in the neighborhood of 3,800,000%.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Riding Buffett's coattails has been a moneymaking proposition for decades
Because of Buffett's exceptional track record, Wall Street and retail investors tend to pay very close attention to what he and his investing team are buying and selling. After all, riding the coattails of the Oracle of Omaha has been an extremely profitable venture for decades.
Last week, the much-anticipated Form 13Fs were filed with the Securities and Exchange Commission (SEC). A 13F is a quarterly filing submitted by money managers with at least $100 million in assets under management. In simple terms, it provides a snapshot of what fund managers, like Buffett, were buying and selling during the most recent quarter (in this case, the fourth quarter of 2021).
For instance, 13F filings have allowed investors to see that Berkshire Hathaway has piled into telecom stock Verizon Communications (VZ 2.85%) over the past 18 months. Though Buffett typically builds up positions over time, he and his team have spent around $9.4 billion acquiring shares of Verizon since mid-2020. Given that Buffett loves dividend stocks, these big buys of Verizon stock look to be a smart way to generate dividend income in an environment of historically low interest rates.
Form 13F has also allowed investors to see just how much conviction Buffett has in Apple (AAPL 0.64%), Berkshire Hathaway's largest holding. According to Berkshire's 2020 annual report, the company's cost basis on its 907.6 million shares of Apple was about $31.1 billion. With the exceptions of Bank of America, Verizon, and preferred shares of Occidental Petroleum, Berkshire doesn't have a cost basis on any single position of more than $6 billion. This really demonstrates how much faith Buffett has in Apple CEO Tim Cook and Apple's robust capital-return program.
Image source: Getty Images.
There's $51 billion in buys you won't find in Berkshire Hathaway's 13F
But what if I told you there was a stock Warren Buffett's been buying over the past three years that's nearly equal to the cost basis of Apple ($31.1 billion), Bank of America ($14.6 billion), and Verizon ($9.4 billion by my estimate), combined?
What's more, what if I told you that you won't find any evidence of this buying in the 13Fs Berkshire Hathaway files on a quarterly basis with the SEC?
Since mid-2018, Buffett and his right-hand man Charlie Munger have spent a little over $51 billion of their company's cash hoard buying shares of a single company that they feel is clearly undervalued. That under-the-radar company is (cue the twist)...Berkshire Hathaway.
Berkshire might be one of the world's largest companies by market cap, but it's not a brand name by any means. Ask your family or friends if they're familiar with Apple, Coca-Cola, or Verizon, and you'll almost certainly get a thumbs-up. But ask them if they're familiar with conglomerate Berkshire Hathaway, and you'll probably get a lot of raised eyebrows and questioning looks.
Prior to July 2018, the repurchasing of Berkshire Hathaway's stock could only occur if shares traded at or below 120% of book value (that is, a 20% or lower premium to book value). Between 2013 and mid-2018, Berkshire Hathaway's shares consistently traded for 130% to 160% of book value, which made buybacks impossible.
But that all changed on July 17, 2018, which is when Berkshire's board passed new measures concerning share repurchases. As long as the company has at least $20 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet, and Warren Buffett and Charlie Munger agree that Berkshire Hathaway is trading below its intrinsic value, buybacks can happen without a set cap.
Since mid-2018, Buffett and Munger have had a field day, with buybacks totaling:
- $1.3 billion in 2018
- $5 billion in 2019
- $24.7 billion in 2020
- $20.2 billion through the first nine months of 2021
With Berkshire Hathaway lugging around $149.2 billion in cash as of Sept. 30, 2021, I'd imagine more share repurchases are on the way.
Image source: Getty Images.
There's more to like about Berkshire Hathaway than its record buybacks
The great thing about share repurchases is that they can have a positive impact on earnings per share, making a profitable company appear more fundamentally attractive. But there's a lot more to like about Berkshire Hathaway than just its robust buyback program.
For example, Buffett and his team have packed the company's nearly $343 billion investment portfolio with cyclical businesses. Cyclical companies tend to perform well when the U.S. and global economies are expanding, and they struggle when recessions strike. Buffett is well aware that recessions are inevitable. But he also knows that recessions usually last for a few months to a couple of quarters, whereas periods of economic expansion typically extend for years, if not a decade.
One of the reasons Berkshire has outperformed so much since the mid-1960s is Buffett's insistence that his company's investments be held for long periods of time. These multiyear and multidecade holding periods allow Berkshire to take advantage of the natural expansion of the U.S. and global economies over time.
Another reason Berkshire Hathaway is such a great stock to own is Buffett's aforementioned love of dividend stocks. This year, Berkshire is on track to collect more than $5 billion in dividend income, with more than $4 billion coming from just a half-dozen stocks. Relative to the company's cost basis, Berkshire's yield on cost is around 5%.
Dividend stocks are often profitable, time-tested businesses with transparent long-term outlooks. In other words, they're the perfect place for one of the world's most successful investors to park his company's money over the long run.
