Among successful money managers, Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.21%) CEO Warren Buffett is, arguably, in a class of his own.
Since becoming CEO of Berkshire in 1965, the Oracle of Omaha has led his company's shares to an average annual return of 20.1%, through Dec. 31, 2021. In total, we're talking about an aggregate return of greater than 3,600,000% in 57 years, as well as the creation of around $600 billion in value for Berkshire Hathaway's faithful shareholders.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Buffett's success is a reflection of a long list of factors, including his portfolio concentration, narrow investment focus, and love of dividend stocks. But among the many factors responsible for the Oracle of Omaha's success, patience has to be at or near the top of the list. Of the 52 securities currently held by Berkshire Hathaway, 15 have been continuous holdings for at least 10 years. Here's a look at the companies that have formed the foundation of Warren Buffett's portfolio for a decade, if not longer:
- Coca-Cola (KO 0.78%): 34 years as a continuous holding
- American Express (AXP -0.31%): 29 years
- Moody's (MCO 1.26%): 22 years
- Globe Life (GL 5.44%): 21 years
- Procter & Gamble (PG 0.65%): 17 years
- Johnson & Johnson (JNJ 0.22%): 16 years
- U.S. Bancorp (USB -3.61%): 16 years
- United Parcel Service (UPS -0.45%): 16 years
- Mondelez International (MDLZ 0.80%): 15 years
- BYD (BYDD.F -0.46%): 13 years
- Bank of New York Mellon (BK 0.85%): 12 years
- Mastercard (MA 0.07%): 11 years
- Visa (V 0.49%): 11 years
- DaVita (DVA -1.65%): 10 years
- General Motors (GM -0.47%): 10 years
Aside from the generalization that Warren Buffett prefers to see his investing thesis play out over multiple years or decades, there are certainly some trends that stand out from this list of Berkshire Hathaway's longest continuous holdings.
Warren Buffett prefers to hold financial stocks for an extensive period of time
Among the 15 stocks Warren Buffett and his investing team have been holding for between 10 and 34 years, seven are financial stocks: American Express, Moody's, Globe Life, U.S. Bancorp, Bank of NY Mellon, Mastercard, and Visa. This really shouldn't come a surprise given that Buffett knows the financial sector inside and out, and it's probably his favorite place to put his company's cash to work.
Perhaps the best thing about financial stocks is their cyclical ties. Even though Warren Buffett is well aware that recessions are an inevitability, he also knows that periods of economic expansion last considerably longer than contractions. By purchasing an assortment of banks, insurance stocks, and payment processors, Buffett is playing a simple numbers game that, over long periods of time, allows Berkshire to take advantage of the natural expansion of the U.S. and global economy.
In many instances, he's also chosen best-of-breed-type financial stocks. For example, Visa and Mastercard are the clear-cut No's 1 and 2 in U.S. credit card network purchasing volume. As of 2020, Visa and Mastercard respectively accounted for 54% and 23% of credit card network purchase volume in the largest market for consumption in the world. With payments steadily moving away from cash and toward plastic or digital formats, both Visa and Mastercard have sustained double-digit annual growth runways.
Image source: Getty Images.
Mature businesses that can be set on autopilot tend to stick around in Buffett's portfolio
Another thing you'll notice about many of the 15 stocks held by Buffett for a decade or longer is that they're mature business which can effectively be set on autopilot over long periods of time.
A perfect example would be healthcare conglomerate Johnson & Johnson. Healthcare stocks are highly defensive in the sense that, no matter how well or poorly the U.S. economy and stock market perform, there's always demand for prescription drugs, medical devices, and healthcare services.
In addition to being defensive, J&J's operating model has all of the puzzle pieces necessary to grow in virtually any economic environment. Johnson & Johnson generates the bulk of its growth and operating margin from selling brand-name drugs. However, pharmaceuticals offer a finite period of sales exclusivity. To counter this, J&J can lean on its leading medical device segment, which is perfectly positioned to take advantage of an aging domestic population and an international community whose access to medical care is improving.
Consumer goods behemoth Procter & Gamble is yet another example of a set-it-and-forget-it investment. P&G provides a wide assortment of nondiscretionary items, which is its key to generating highly predictable and transparent operating cash flow. Even if recessions occur, consumers are still going to buy detergent, toothpaste, paper towels, diapers, toilet paper, and an array of household and health items.
To add, J&J and P&G have some of the longest active streaks among publicly traded stocks of increasing their base annual dividend each year.
A superior dividend could be a golden ticket to a lengthy stay in Berkshire's portfolio
The third and final trend to note about Warren Buffett's longest-held stocks is that he loves companies that provide a market-topping dividend. This is especially true with the U.S. inflation rate hitting a four-decade high of 9.1% in June.
Dividend stocks offer a number of benefits to shareholders. They're usually profitable on a recurring basis, time-tested, and their outlooks are typically transparent. It also doesn't hurt that income stocks have, over long periods of time, vastly outperformed their non-dividend-paying peers.
You might not realize it, but Coca-Cola, American Express, and Moody's are three ideal examples of superior dividend stocks within Berkshire Hathaway's portfolio. Even though these three companies have yields that aren't eye-popping, the extensive length of time Buffett has held these stocks, coupled with the base annual payout growth in each company, has sent their yield relative to Berkshire's cost basis skyrocketing higher.
After 34 years, Coca-Cola's base annual payout has grown to $1.76/share. With Buffett's company holding Coke at an average share price of approximately $3.25, we're talking about an annual yield on cost of 54%! There's absolutely no reason to sell Coca-Cola when Buffett is more than doubling his initial investment in the company every two years.
It's a similar story with American Express and Moody's. AmEx is parsing out $2.08/share annually, while Moody's is doling out $2.80/share each year. Considering that Berkshire Hathaway has respective cost bases of $8.49 on American Express and $10.05 on Moody's, the result is a yield relative to cost of nearly 25% with AmEx and close to 28% with Moody's. These are stocks that may never be sold by Buffett or his investing team.
