Few investors have garnered as much prominence on Wall Street as Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett. In the 58 years the Oracle of Omaha has held the reins, he's overseen a 4,264,684% increase in his company's Class A shares (BRK.A), as of the closing bell on July 21, 2023.
Although Buffett isn't infallible, he's demonstrated a knack for picking winners over the long run. Yet what's interesting about his investing approach is his penchant for portfolio concentration.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett and his right-hand man, Berkshire's Executive Vice Chairman Charlie Munger, have long believed that diversification is only necessary if you don't know what you're doing. This has led Buffett and his investing lieutenants, Ted Weschler and Todd Combs, to put a lot of money to work in their perceived-to-be best ideas.
At the moment, 69% ($259.5 billion) of the $378 billion portfolio Warren Buffett oversees at Berkshire Hathaway is invested in just four stocks.
Apple: $175.7 billion (46.5% of invested assets)
The Oracle of Omaha's preference for betting big on his best ideas is plain as day with tech stock Apple (AAPL -0.35%), which he dubbed as "a better business than any we own" during Berkshire Hathaway's 2023 annual shareholder meeting. The more than 915 million shares of Apple stock held by Berkshire equates to $175.7 billion in market value, or nearly 47% of invested assets.
Brand-name recognition is clearly important for Apple. It's consistently recognized as one of the most valuable brands in the world and has a loyal customer base to back it up.
This loyalty should be enhanced even more by the company's evolution into subscription services. CEO Tim Cook is overseeing this transition, which should help minimize Apple's reliance on physical products such as the iPhone and Mac over time, as well as improve the company's operating margin. In particular, a services-focused Apple may see less in the way of revenue fluctuations when it makes big changes to its (current) core revenue driver, the iPhone.
Warren Buffett is also, undoubtedly, a huge fan of Apple's capital-return program. Although its yield of 0.5% is pedestrian, Apple is doling out more than $15 billion annually in payouts to its shareholders.
Further, the company has repurchased approximately $586 billion worth of its common stock over the last 10 years. No other publicly traded company has come remotely closing to buying back this much stock in a decade. As a reminder, share buybacks are aimed at reducing the number of shares outstanding. For companies with steady or growing net income, this can lead to higher earnings per share.
Bank of America: $33 billion (8.7% of invested assets)
The financial sector has long been Warren Buffett's favorite for putting Berkshire's capital to work. For the moment, Bank of America (BAC -0.21%) stands out as his absolute favorite bank stock to own. BofA, as Bank of America is more commonly known, accounts for $33 billion of Berkshire Hathaway's roughly $378 billion in invested assets.
In Buffett's eyes, bank stocks are long-term moneymakers. Though banks are cyclical and susceptible to higher loan losses and credit charge-offs during recessions, periods of expansion have, historically, lasted considerably longer than downturns. This means banks are disproportionately benefiting from lengthy economic expansions, which allow them to expand their deposit base and loan portfolio.
While JPMorgan Chase is widely considered to be the cream of the crop among U.S. money-center banks, Bank of America finds itself uniquely positioned to benefit from the current economic environment. As the most interest-sensitive of America's biggest banks by assets, BofA is benefiting immensely from the Federal Reserve's most-aggressive rate-hiking cycle in more than four decades. The federal funds rate has moved 500 basis points higher since March 2022; that's added billions of dollars in net-interest income to BofA's bottom line each quarter.
Bank of America's focus on improving digital adoption is working wonders, as well. On a trailing-three-year basis, ended June 30, 2023, the percentage of households banking online or via mobile app has grown from 68% to 74%. Likewise, digital unit sales have steadily been climbing (51% of total sales in the June-ended quarter).
Digital transactions are far less costly for banks than in-person interactions. Spending on digitization initiatives has made BofA a more efficient company.
Image source: American Express.
American Express: $25.8 billion (6.8% of invested assets)
The third stock that comprises a sizable percentage of Berkshire Hathaway's invested assets is credit-services provider American Express (AXP -0.62%), which is also known as "AmEx." AmEx has been a continuous holding of Berkshire's for the past 30 years.
The numbers game that Warren Buffett and his investing lieutenants are playing with Bank of America is also applicable to American Express. While financial stocks like AmEx are cyclical, periods of uncertainty tend to be short-lived. Buying and holding a key credit-services provider like AmEx allows Buffett to take advantage of multiyear economic expansions.
The benefit of lengthy growth periods for American Express is that it's able to hit both sides of a transaction. As of 2021, it was the clear No. 3 payment processor in the U.S., by credit card network purchase volume. This allows the company to collect fees from merchants when processing transactions. A booming economy where both transaction count and purchase volume are rising is a good thing.
However, AmEx is also a lender. It's able to generate annual fees and/or interest income from its cardholders. Periods of economic expansion often translate to fewer delinquencies and charge-offs.
Additionally, American Express has always been adept at attracting high-earning consumers. The well-to-do are less likely to alter their spending habits during periods of high inflation or when minor economic disruptions take place. It suggests AmEx is in a better position to deal with economic downturns than many of its peers.
Coca-Cola: $25 billion (6.6% of invested assets)
The fourth company Warren Buffett has absolutely piled into is beverage stock Coca-Cola (KO). The company has been a continuous holding since 1988 and currently accounts for $25 billion of Berkshire's invested assets. When combined with Apple, Bank of America, and American Express, these four stocks make up 69% of Berkshire Hathaway's investment portfolio (excluding fully owned assets).
The lure of Coca-Cola is the company's top-notch predictability. Food and beverages are basic necessities, and Coke just happens to be one of the most recognized brands in the world. Despite a global pandemic, rampant economic uncertainty, and a war in Ukraine, the company has delivered an average organic growth rate of 7% over the previous five years, ending December 2022.
One of the keys to Coca-Cola's success is its geographic and product-based diversity. It currently has operations in all but three countries (North Korea, Cuba, and Russia) and is responsible for 26 brands generating at least $1 billion in annual sales. In other words, it's generating predictable cash flow in developed countries and can take advantage of an industry-forecasted 8% to 10% compound annual growth rate in emerging markets between 2023 and 2026.
Coca-Cola's marketing team is also masterful at making impressions count. The company is spending more than half of its marketing budget on digital media and has been tinkering with artificial intelligence to create and tailor content for consumers. On top of reaching for a younger consumer, Coca-Cola has brand-name sports partnerships, well-known ambassadors, and holiday tie-ins that help it connect with more mature audiences.
Lastly, Coca-Cola's dividend packs quite the punch for Berkshire Hathaway. With Buffett's company sitting on a cost basis of approximately $3.2475 for its Coke shares, the company's current annual payout of $1.84/share works out to a yield relative to cost of 57%! The Oracle of Omaha is watching his initial investment in Coca-Cola more than double every two years, based solely on dividends.
