Since becoming the CEO of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) in 1965, Warren Buffett has masterfully steered the ship. Whereas the benchmark S&P 500 hasn't quite reached a 30,000% total return, including dividends paid, since Buffett became CEO, he's overseen a 4,544,578% aggregate gain in his company's Class A shares (BRK.A), as of the closing bell on Sept. 19, 2023.
Although Buffett isn't infallible, he has a knack for picking far more winners than losers. It's why professional and everyday investors closely track the Oracle of Omaha's buying and selling activity via quarterly 13F filings. Riding Buffett's coattails has been a wildly profitable strategy for more than a half-century.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
However, there's a big difference between Warren Buffett and his investing lieutenants, Todd Combs and Ted Weschler, putting hundreds of millions of dollars to work in a brand-name company, and investing tens of billions in a time-tested business.
For instance, no one would question Warren Buffett's love for beverage stock Coca-Cola or credit-services provider American Express. But these are investments where time has been Buffett's greatest ally. Though they're top holdings by market value in Berkshire Hathaway's nearly $356 billion portfolio, Coca-Cola and AmEx each have initial cost bases of around $1.3 billion.
Comparatively, Warren Buffett and his team have put approximately $150 billion of Berkshire Hathaway's cash to work in just four stocks.
Chevron: $15.6 billion cost basis (estimated)
According to 13F aggregation website WhaleWisdom.com, Berkshire Hathaway's estimated cost basis on the 123,120,120 shares it owns of energy stock Chevron (CVX 0.37%) is $126.58. This means Buffett and company have doled out around $15.6 billion to buy shares of Chevron since the fourth quarter of 2020.
The reason such a sizable bet has been made on one of the world's largest oil and gas stocks looks to be the expectation that the spot price for crude oil will remain elevated, or perhaps head even higher.
For more than three years during the COVID-19 pandemic, global energy majors scaled back their capital expenditures. When coupled with Russia's invasion of Ukraine and the energy demand uncertainty this creates for most of Europe, there's a good likelihood that crude oil supply will remain tight/constrained for years to come. As a general rule, when the supply of a necessary commodity is restrained in any way, the price of that commodity tends to move higher. Chevron generates its best operating margins from its upstream drilling segment.
However, Chevron is also an integrated energy company. On top of drilling, it operates transmission pipelines, refineries, and chemical plants. These midstream and downstream assets provide predictable operating cash flow and can help Chevron hedge against possible downside in the spot price of crude oil.
And let's face it, no one had to twist Warren Buffett's arm to take advantage of Chevron's premier capital-return program. Chevron's board OK'd an up to $75 billion share repurchase program earlier this year, and the company has raised its base annual payout for 36 consecutive years.
Bank of America: $26.5 billion cost basis (estimated)
Another stock Warren Buffett has absolutely piled Berkshire Hathaway's cash into is money-center giant Bank of America (BAC -0.21%), which is commonly known as "BofA." With over 1 billion shares held and an estimated cost basis of $25.68, per WhaleWisdom, Buffett has spent about $26.5 billion building his company's stake in BofA.
The reason the Oracle of Omaha loves bank stocks so much is because they're cyclical and they generate recurring revenue. Even though downturns in the U.S. economy are perfectly normal, economic expansions last considerably longer than recessions. It means banks like BofA are benefiting from loan and investment growth over time from these disproportionately longer periods of expansion.
It also doesn't hurt that Bank of America is the most interest-sensitive among the nation's biggest banks. The steepest rate-hiking cycle by the Federal Reserve in four decades has added billions of dollars in net-interest income each quarter to Bank of America's bottom line.
While often viewed as a stodgy "old" bank, BofA is making plenty of headway with its technology investments. More specifically, the percentage of households banking digitally (online or via mobile app) has been steadily climbing. It's considerably cheaper for Bank of America when its customers bank online or via its mobile app, compared to in-person interactions.
Lastly, BofA sports a healthy capital-return program. Berkshire Hathaway is set to collect almost $992 million in dividend income from its BofA stake over the next 12 months.
Image source: Apple.
Apple: $36.3 billion cost basis (estimated)
Unsurprisingly, Warren Buffett has sunk quite a bit of Berkshire Hathaway's cash into tech stock Apple (AAPL -0.35%). The company Buffett dubbed "a better business than any we own," during Berkshire's May 2023 annual shareholder meeting has an estimated cost basis of $36.3 billion.
There's a laundry list of reasons the Oracle of Omaha loves Apple as a company and an investment. However, I'll whittle it down to three prevailing factors: brand power, innovation, and of course, its capital-return program.
Apple is widely viewed as one of the world's most-valuable and most-recognized brands. Consumers frequently flock to Apple's stores and retail locations when its physical products hit displays. Perhaps most importantly, consumers trust the brand and investors, like Buffett, have complete faith in Apple's leadership, including CEO Tim Cook.
There's also Apple's innovation, which has long been the driver of its sales and profit growth. Apple accounts for roughly half of all U.S. smartphone market share since introducing 5G-capable versions of its iPhone during the fourth quarter of 2020. It's evolving as a platforms company, too, with subscription services growth expected to increase its operating margin over the long run.
Best of all, no publicly traded company in the U.S. can hold a candle to Apple's capital-return program. It's doling out $15 billion in annual dividends to its shareholders and has repurchased around $600 billion worth of its common stock since kick-starting its buyback program in 2013.
Berkshire Hathaway: in excess of $71.1 billion
However, the stock Warren Buffett has put more of Berkshire Hathaway's cash to work in than any other is (ironically)... Berkshire Hathaway. Don't you love a reveal with a plot twist? Since Berkshire Hathaway's share repurchase program was amended in July 2018 to give Buffett and executive vice chairman Charlie Munger more ability to act, the company's dynamic duo has overseen more than $71.1 billion worth of buybacks.
Despite Buffett's company being on track to collect more than $6 billion in dividend income over the next 12 months, Berkshire Hathaway doesn't pay a dividend. Instead, the Oracle of Omaha rewards his long-term shareholders via buybacks, which come with three distinct benefits.
To start with, consistently repurchasing stock will reduce Berkshire's outstanding share count and make each remaining share that much scarcer. In other words, it'll steadily increase the ownership stakes of the company's shareholders.
Secondly, but building on the previous point, a declining outstanding share count for a company with steady or growing net income (like Berkshire Hathaway, sans unrealized investment gains/losses) should lead to higher earnings per share (EPS) over time. Higher EPS can make Berkshire Hathaway stock even more attractive to fundamentally focused investors.
Third and finally, Buffett's and Munger's aggressive buyback program signals the unwavering faith they have in the company they've built over many decades. Even though Berkshire Hathaway has down years from time to time, the bulk of its investment portfolio and owned assets are cyclical businesses. Buffet, Munger, Combs, and Weschler, have all positioned Berkshire Hathaway to excel during extended periods of economic expansion.
