Although Berkshire Hathaway (BRK.A -0.18%) (BRK.B 0.05%) isn't much of a household name, its CEO, billionaire Warren Buffett, certainly is. Since taking the reins at Berkshire Hathaway in the mid-1960s, the Oracle of Omaha has doubled up the annualized total return, including dividends paid, of the S&P 500 (19.8% versus 9.9%). This substantial long-term outperformance is what coerces more than 30,000 investors and shareholders to trek to Omaha, Nebraska, every year to listen to Warren Buffett speak.
The latest Berkshire Hathaway annual shareholder meeting didn't disappoint. The traditional five-hour question-and-answer session that Warren Buffett and executive vice chairman Charlie Munger grant members of the audience usually results in invaluable nuggets of wisdom being passed along, as well as gaining added insight into Buffett's investment/analysis process.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Perhaps the biggest reveal during the 2023 annual meeting was the Oracle of Omaha's true feelings about tech stock Apple (AAPL 0.48%), which is a pillar for Berkshire Hathaway, but technically isn't the Oracle of Omaha's favorite stock to buy.
"A better business than any we own"
On one hand, all you have to do is pull up any of Berkshire Hathaway's 13Fs to get a feeling for how Buffett and his investing lieutenants, Ted Weschler and Todd Combs, "feel" about Apple. As of last week, Apple accounted for more than 47% of Berkshire's $333 billion of invested assets. This includes the more than 20 million additional shares of Apple added during the first quarter by Buffett and his team.
However, the Oracle of Omaha made sure not to mince his words when challenged about the idea of Apple accounting for a potentially dangerous share of Berkshire Hathaway's invested assets during his company's annual meeting. Said Buffett:
But Apple is not 35% of Berkshire's portfolio. Berkshire's portfolio includes the railroad, the energy business, Garanimals, you name it, See's Candy. They're all businesses... They're good businesses.
And to think that our criterion -- our criteria for Apple is different than the other businesses we own, it just happens to be a better business than any we own. And we put a fair amount of money in it, but we haven't got more money in it than we've got in the railroad. And Apple is a better business. Our railroad is a very good business. It was not remotely as good as Apple's business.
To be sure, Apple has checked all of Buffett's key points for some time. He certainly trusts the management team, which is headed by CEO Tim Cook. Not only is Apple continuing to lead the charge with the physical products that endeared the company with consumers (iPhone and Mac), but it's evolving with new subscription services. Apple's services segment should help the company minimize revenue fluctuations associated with iPhone replacement cycles, as well as bolster its operating margin over time.
Buffett also appreciates the value of a well-known brand. Apple is pretty consistently at or near the top of the list when it comes to brand value, and its customer base has proven exceptionally loyal. Subscription services should only enhance the loyalty of the company's customers.
And, of course, Warren Buffett's best business believes in rewarding its long-term shareholders. Apple is parsing out one of the largest nominal-dollar dividends among publicly traded companies, and it's repurchased a jaw-dropping $586 billion worth of its common stock over the past 10 years. Not including itself, Apple has spent more buying back its stock since 2013 than the market caps of 493 out of the other 499 S&P 500 companies.
Image source: Getty Images.
Move over, Apple! This is Warren Buffett's undisputed favorite stock to buy
But here's something you might not realize: Despite Buffett's love for Apple, it's not his favorite stock to buy. In fact, it's not even close.
Normally, perusing Berkshire Hathaway's quarterly 13F filings will tell you everything you need to know about what Buffett and his investing lieutenants have been buying and selling. However, Berkshire's 13Fs aren't providing the complete picture regarding Warren Buffett's favorite stock to buy (cue ironic music)... Berkshire Hathaway.
Prior to mid-July 2018, the Oracle of Omaha and his right-hand man Charlie Munger were only allowed to repurchase shares of their company's stock if it fell to or below 120% of book value (i.e., no more than 20% above book value). For more than a half-decade leading up to mid-July 2018, Berkshire Hathaway's stock never hit this mark, leading to no share buybacks.
On July 17, 2018, things changed in a big way. Berkshire's board passed new measures that gave Buffett and Munger significantly more discretion to buy back their company's stock. As long as Berkshire Hathaway has at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet and both Buffett and Munger agree Berkshire's stock is trading below its intrinsic value, repurchases can be made with no ceiling or cap.
Since mid-July 2018, Buffett and Munger have overseen share buybacks every single quarter. During the recently ended first quarter, a little over 5,100 Class A shares were repurchased, along with close to 6.72 million Class B shares, which equated to almost $4.44 billion spent on share buybacks. In less than five years, Buffett has overseen the repurchase of $70 billion worth of his favorite stock, which is nearly double what's been spent purchasing shares of Apple since the beginning of 2016.
Since Berkshire Hathaway doesn't pay a dividend, share buybacks are an easy way to reward long-term investors. For starters, steadily buying back stock and lowering the outstanding share count increases the ownership stakes of existing shareholders. It's the same principle as Berkshire Hathaway becoming a large stakeholder in Apple without having to buy any additional shares.
What's more, buying back stock can have a positive impact on earnings per share (EPS). For businesses like Berkshire Hathaway that have steady or growing net income, a lower outstanding share count will provide a lift to EPS. Berkshire Hathaway is already a fundamentally attractive investment. Add on a stream of buybacks that boost its EPS over time, and it could become even more attractive.
Repurchasing $70 billion worth of Berkshire Hathaway stock in less than five years is also a clear indication from Buffett and Munger that they're confident in the business they've built. Many of the companies Berkshire owns and has invested in are cyclical, which means they're poised to take advantage of disproportionately long periods of economic expansion.
Therefore, no matter how much the Oracle of Omaha praises Apple, there's absolutely no question that Berkshire Hathaway is Warren Buffett's favorite stock to buy.
