For the better part of six decades, Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) CEO Warren Buffett has put on a moneymaking clinic for Wall Street. He's created more than $630 billion in value for his company's shareholders since becoming CEO in 1965, as well as delivered an aggregate return of 3,641,613% for his company's Class A shares (BRK.A). That compares to a total return, including dividends, of 30,209% for the benchmark S&P 500 over the same time frame.
The Oracle of Omaha's success as an investor is based on a multitude of factors, including his love of cyclical businesses, his willingness to hold stocks for years and decades at a time, and packing Berkshire's portfolio with dividend stocks. But what's often overlooked is that Buffett shuns diversification in favor of concentration. He doesn't believe diversification is necessary if you know what you're doing.
Although Berkshire Hathaway's portfolio was packed with more than 50 securities, as of this past weekend, just seven stocks accounted for 80% of the company's invested assets.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
1. Apple: 41.4% of invested assets
All the evidence you need that Warren Buffett shuns unnecessary diversification can be seen in Berkshire's Apple (AAPL -1.22%) position, which accounted for better than 41% of Buffett's company's $339.5 billion in invested assets, as of July 24.
Apple is what Buffett considers a core business for Berkshire Hathaway. It has an exceptionally loyal customer base, is one of the most-recognized brands in the world, and it's relied on innovation to drive its results for decades. Since introducing a 5G-capable iPhone during the fourth quarter of 2020, Apple has maintained a 50% or greater share of the U.S. smartphone market in five out of six quarters, according to Counterpoint Research.
Apple finds itself in the middle of an operating transition that'll place added emphasis on its higher-margin services. By becoming more of a platform company, Apple should be able to better manage the revenue peaks and troughs often associated with product replacement cycles.
Also, Apple has repurchased nearly $499 billion worth of its common stock since the beginning of 2013. Repurchasing stock and paying a hearty dividend is an easy way to win over Warren Buffett.
2. Bank of America: 10.2% of invested assets
I'd argue there isn't an industry on the planet that Warren Buffett loves putting Berkshire Hathaway's money to work in more than bank stocks. And based on Berkshire's portfolio, there's not a big bank the Oracle of Omaha loves more than Bank of America (BAC 3.35%).
The great thing about banks is they're cyclical. Even though they're exposed to inevitable recessions in the U.S. economy, these recessions tend to last only a couple of quarters. By comparison, periods of economic expansion can go on for years. Buffett is playing a simple numbers game with his bank holdings that allows Berkshire to take advantage of the natural expansion of the U.S. economy.
What makes BofA extra special is its interest rate sensitivity. No money-center bank is more sensitive to interest rates moving up or down. In Bank of America's case, rapidly rising interest rates are having a positive effect on its net-interest income earning capacity from outstanding variable-rate loans. BofA estimates that a 100-basis-point parallel shift in the interest rate yield curve will produce an estimated $5 billion in extra net-interest income over 12 months.
Image source: Coca-Cola.
3. Coca-Cola: 7.3% of invested assets
Beverage stock Coca-Cola (KO 2.14%) is a literal fixture in Warren Buffett's portfolio. It's his company's longest-tenured stock, with Coke being a continuous holding since 1988.
One reason Buffett has hung on to his Coca-Cola shares is the company's geographic diversity. Except for just three countries (North Korea, Cuba, and Russia), Coke is operating in every other nation worldwide. This means it's generating highly predictable cash flow in mature markets, and is taking advantage of organic growth opportunities in emerging markets.
Coca-Cola has a top-notch marketing department as well. Few companies have a brand as recognized as Coca-Cola or are able to transcend generational gaps quite like Coke.
As a final point, Coca-Cola has increased its base annual dividend in each of the last 60 years. Because Berkshire Hathaway has a diminutive cost basis of $3.25 on its shares of Coca-Cola, it's netting an annual yield on cost of a jaw-dropping 54%.
4. American Express: 6.8% of invested assets
Have I mentioned that Warren Buffett likes bank stocks? Next to Coca-Cola, credit services company American Express (AXP 6.22%) is Berkshire's longest-held stock (a continuous holding since 1993).
Similar to BofA, the cyclical numbers game is AmEx's biggest weapon. During long-winded periods of economic expansion, it's able to "double-dip": It collects a processing fee from merchants, as well as interest income and/or annual fees from its credit cardholders (consumers and businesses).
American Express also benefits from its strong ties to the well-to-do. Few credit providers are more successful in attracting affluent clientele. People with higher incomes are less likely to change their spending and repayment habits when minor economic hiccups arise. This key point has allowed AmEx to navigate recessions better than most financial stocks.
And like Coke, American Express is generating a huge yield on cost for Buffett's company. Based on a cost basis of $8.49, AmEx's annual payout of $2.08 equates to a yield of cost of more than 24%.
West Texas Intermediate crude oil prices have soared over the past year. WTI Crude Oil Spot Price data by YCharts.
5. Chevron: 6.8% of invested assets
Although it's a relatively newer holding, oil and gas major Chevron (CVX 1.54%) has quickly ascended the ladder to become one of Warren Buffett's top holdings. Berkshire acquired more than 120.9 million shares of Chevron during the first quarter of 2022.
The simple reason behind Buffett's big bet on Chevron looks to be the expectation that oil, natural gas, and natural gas liquid prices remain elevated for years. The lack of capital investment from major energy companies during the pandemic, coupled with supply chain disruptions stemming from Russia's invasion of Ukraine, could provide upward pressure on commodity prices for a long time to come.
However, Buffett can likely take solace in Chevron's integrated operating model. In addition to its higher-margin upstream drilling and exploration assets, Chevron operates pipelines, refineries, and chemical plants. If commodity prices weaken, it can lean on the predictable cash flow of its pipelines, or rely on its downstream refineries and chemical plants as a hedge. Lower oil prices reduce input costs for downstream assets.
6. Kraft Heinz: 3.7% of invested assets
There aren't many duds within Warren Buffett's portfolio, but it could be argued that packaged foods and beverage company Kraft Heinz (KHC 1.80%) is exactly that.
The Oracle of Omaha has admitted that Heinz overpaid for Kraft Foods, which resulted in a $15.4 billion goodwill write-down in 2019. Even after this write-down, Kraft Heinz is still lugging around a hefty amount of goodwill and debt, leaving the company with minimal financial flexibility or capital to reignite interest in its brands.
If there's a silver lining here, it's that the COVID-19 pandemic has encouraged consumers to purchase easy-to-prepare meals and eat at home more often. That's provided a nice lift to Kraft's organic growth rate in the near term. What's unknown is if this organic growth lift can be sustained once the pandemic is put into the rearview mirror.
With a 26.6% stake in Kraft Heinz, Berkshire is effectively locked into its position. Despite providing a hearty annual dividend, Kraft Heinz leaves a lot to be desired from an investment standpoint.
OXY Total Long Term Debt (Annual) data by YCharts.
7. Occidental Petroleum: 3.3% of invested assets
Last, but not least, Warren Buffett has piled into oil stock Occidental Petroleum (OXY 0.89%). Seemingly every couple of weeks, Berkshire Hathaway files paperwork with the Securities and Exchange Commission noting that it's added to its now 19.4% stake in Occidental.
Similar to Chevron, Buffett's affinity for Occidental Petroleum has to do with the likelihood that oil and natural gas prices will remain higher than normal for an extended period of time. Occidental has a significant presence as a deepwater producer in the Gulf of Mexico, and it could benefit even more than Chevron due to the high margins of its upstream assets.
However, Occidental Petroleum is carrying quite a bit of debt on its balance sheet. Acquiring Anadarko in 2019, shortly before oil and gas demand fell off of a cliff due to COVID-19, put Occidental in a huge hole that it's still trying to dig its way out of. Even with the company generating historically high operating cash flow, it's still buried beneath $25.9 billion in net debt.
While Buffett's long-term investing track record speaks for itself, this looks to be one of his more questionable investments of the past decade.
