Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has a knack for making his long-term shareholders notably richer. Since becoming CEO in 1965, the Oracle of Omaha, as he's affably known, has overseen a greater than 4,400,000% return in his company's Class A shares (BRK.A). This works out to a nearly 20% annualized return over 58 years.
Even though Buffett is wrong from time to time, mirroring his buying and selling activity has been profitable for over half a century. Between required quarterly 13F filings with the Securities and Exchange Commission (SEC) and SEC filings for select larger holdings, riding Buffett's coattails is easier than ever.
Based on recent SEC filings, investors have learned that Buffett is selling shares of one of his prized high-yield dividend stocks. At the same time, he's probably continuing to buy shares of his favorite stock -- and no, I'm not talking about tech behemoth Apple (AAPL -0.35%).
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Is this high-yield dividend stock on Buffett's chopping block?
In addition to filing quarterly 13Fs with the SEC, anytime Berkshire Hathaway adds to or reduces its position in a company where it holds a 10% or greater stake, it's required to file Form 4 with the SEC. That's exactly what happened between Sept. 11 and Sept. 13, as well as Sept. 20 through Sept. 22, when Buffett's company pared down its existing stake in personal-computing and printing services company HP (HPQ -0.46%).
According to the separate Form 4 filings, Berkshire Hathaway sold an aggregate of 10,290,644 shares of HP over a two-week stretch. Following these sales, Buffett's company still holds about 110.66 million shares of HP, equating to a hearty 11.2% stake in the company that's worth close to $3 billion. In other words, this nearly 4%-yielding dividend stock still represents a notable portion of Berkshire Hathaway's $347 billion portfolio.
The important question is: Why is Buffett selling shares of HP?
Having tracked Warren Buffett's buying and selling activities for as long as I have, my first instinct was to check HP's share repurchase activity. The Oracle of Omaha is a huge fan of businesses that regularly buy back their stock and increase Berkshire Hathaway's ownership stake without him or his investment team having to lift a finger. In the past, Buffett has had to modestly pare back his holdings in other businesses (mostly bank stocks) as Berkshire's stake has grown via share repurchases.
However, HP's buyback activity has slowed dramatically in fiscal 2023. After outlaying $3.547 billion for buybacks in the nine months ended July 31, 2022, HP has only bought back $100 million worth of its shares thus far in the current fiscal year (as of July 31, 2023). In short, Buffett isn't selling HP for this benign reason.
While it is possible that Buffett's investing lieutenants, Ted Weschler and Todd Combs, persuaded the Oracle of Omaha to modestly pare down Berkshire's stake in HP for other initiatives, the far likelier reason for this modest reduction is that Buffett and his team simply didn't like what they saw from HP's fiscal third-quarter operating results.
Even though Warren Buffett loves a good value stock and has a long-term mindset, HP's quarterly report was disappointing. HP President and CEO Enrique Lores commented that "the external environment has not improved as quickly as anticipated and we are moderating our expectations as a result." In simpler terms, PC sales and printing service needs remain weak and likely to stay that way for a while.
Despite offering one heck of a value proposition (a forward price-to-earnings ratio of 8) and a nearly 4% yield, HP's lack of sustained growth and the need to reduce its long-term debt to improve its financial flexibility may have removed the luster this company once had in Warren Buffett's eyes. I wouldn't be all that surprised to see additional sales of HP from Berkshire Hathaway in the weeks, months, and quarters to come.
Image source: Getty Images.
Warren Buffett is likely buying his favorite stock
On the other hand, it's very likely that Warren Buffett has been buying his favorite stock since this quarter began on July 1.
Although the Oracle of Omaha referred to Apple as "a better business than any we own" during Berkshire Hathaway's annual shareholder meeting in May, and Apple represents an otherworldly 46% of his company's $347 billion of invested assets, it's not his favorite company to buy. That title goes to a company even nearer and dearer to the Oracle of Omaha's heart...his own.
Prior to mid-July 2018, Warren Buffett and executive vice chairman Charlie Munger were only able to repurchase shares of Berkshire Hathaway if they fell to or below 120% of book value (i.e., no more than 20% above book value). The problem is that shares of the company pretty consistently traded between 130% and 160% of book value for more than a half-decade, leading to no buybacks.
On July 17, 2018, Berkshire's board passed new measures that got their dynamic duo off the proverbial bench and into the game. Under the new criteria, as long as Berkshire Hathaway has at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet and Buffett and Munger agree that their company's stock is intrinsically cheap, repurchases can be made with no cap.
Since mid-July 2018, Buffett and Munger have OK'd the repurchase of more than $71 billion worth of Berkshire Hathaway stock, almost twice as much as Buffett's company has spent buying shares of Apple since the start of 2016. Further, Berkshire's dynamic duo has bought back Berkshire stock in all 20 quarters since the amendments governing buybacks were changed. While Berkshire isn't cheap at 147% of its book value (as of Sept. 21, 2023), it's also not outside its historic valuation norm. This means some level of stock repurchases are almost certainly being made.
As a reminder, stock buybacks can have a positive fundamental impact on Berkshire Hathaway. For companies with steady or growing net income (like Berkshire Hathaway), buybacks have the ability to increase earnings per share over time. This should help Berkshire Hathaway's stock look even more attractive to fundamentally focused value seekers.
Though we'll have to wait till mid-November to get the full rundown of what the Oracle of Omaha has been buying and selling, there's an above-average probability that Berkshire Hathaway stock has been on his buy list.
