If you've ever wondered why 40,000 investors flock to Omaha, Nebraska, to hear Berkshire Hathaway (BRK.A 0.58%) (BRK.B 0.61%) Chief Executive Officer Warren Buffett speak each year during his company's annual shareholder meeting, just take a closer look at his investment track record. Since taking the reins in the mid-1960s, Berkshire's Class A shares have delivered a jaw-dropping annualized return of 19.8% (as of Dec. 31), which is double the annualized total return, including dividends, of the benchmark S&P 500 (9.9%) over the same time.
In addition to running circles around the major stock indexes, Buffett is admired for his willingness to share his investment philosophy. The Oracle of Omaha typically seeks out brand-name businesses with long track records of success that have trusted management teams.
But a big reason Warren Buffett and his investment team have been so successful is their concentration of Berkshire Hathaway's nearly $350 billion portfolio.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Apple makes up nearly half of Berkshire Hathaway's portfolio -- but it's not Buffett's favorite stock
As of the closing bell on Nov. 10, tech stock Apple (AAPL 1.22%) accounted for a phenomenal 49% of Berkshire Hathaway's invested assets.
Buffett has long believed in putting an outsize share of his company's capital to work in his and his teams' best ideas. During Berkshire's annual shareholder meeting in May, Buffett referred to Apple as "a better business than any we own." Mind you, Berkshire outright owns railroad BNSF and insurer GEICO, which are incredibly well-run businesses on their own.
The reasons Apple grew into such a sizable percentage of Berkshire Hathaway's portfolio over the past seven-plus years include its brand power, innovation, management team, and market-leading capital-return program.
According to Kantar's annual BrandZ Rankings, Apple is the most valuable brand in the world. It's a recognizable, trustworthy brand, and it tends to keep its customers loyal to its ecosystem of products and services.
More importantly, Apple thrives off its innovation. Since introducing the first iPhone in 2007, the company has been on the leading edge of smartphone advances. Within the U.S., the iPhone has accounted for 50% or more of U.S. smartphone share since a 5G-capable version was introduced during the fourth quarter of 2020. Buffett probably can't tell his investors how an iPhone works, but he understands consumer behavior and market-share data that demonstrates how popular the iPhone is domestically.
Buffett is also a big fan of Apple CEO Tim Cook. Under Cook's tenure, Apple has introduced new generations of the iPhone, as well as evolved into a platforms company. Although it's not abandoning the physical devices (iPhone, iPad, and Mac) that allowed it to garner its loyal customer base, Apple is building for the future with various subscription services. This is a high-margin segment that should help smooth out the revenue fluctuations that often occur during major iPhone upgrade and replacement cycles.
Lastly, there's Apple's first-in-its-class capital-return program. It's doling out $15 billion in annual dividends to its shareholders -- Berkshire is on track to collect nearly $879 million in annual dividend income from Apple -- and the company has repurchased north of $600 billion of common stock since its buyback program kicked off in 2013.
Image source: Getty Images.
Warren Buffett has purchased shares of this company for 21 straight quarters
You'd think a company that makes up nearly $171 billion out of Berkshire's $350 billion portfolio would be a stock that Buffett and his investing aides (Todd Combs and Ted Weschler) are buying with frequency. However, this isn't the case. There have been quarters where no shares of Apple were purchased, and even a handful of instances where Berkshire pared its stake.
There is, however, another company that Buffet has purchased, without fail, for 21 consecutive quarters. The catch is that you're not going to find this stock listed in Berkshire Hathaway's quarterly 13F. Rather, you're going to need to examine Berkshire's quarterly operating results. That's because Buffett's favorite stock to buy is shares of his own company.
Berkshire Hathaway's share repurchase program underwent an important change on July 17, 2018. Before that, share buybacks could only be completed if Berkshire Hathaway stock traded at or below 120% of book value. For more than seven years before that, Berkshire's stock never fell to that level. Ergo, not a cent was put to work in share repurchases.
Then Berkshire's board amended its buyback clauses: As long as Berkshire Hathaway had at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet, and both Buffett and his top lieutenant, Charles Munger, believed their company's stock was intrinsically cheap, buybacks were allowed with no set limit.
Since then, Buffett and Munger have authorized more than $72 billion worth of repurchases of Berkshire's Class A (BRK.A) and Class B (BRK.B) stock, including around $1.1 billion in the September-ended quarter. This was the 21st consecutive quarter in which Buffett and Munger approved shares repurchases in their own company.
Since Berkshire Hathaway doesn't pay a dividend, share buybacks are Buffett's way of rewarding his long-term shareholders. Steadily reducing Berkshire's share count over time will increase the ownership stakes of his investors.
Additionally, a declining share count, coupled with steady or rising net income from the roughly five dozen businesses Berkshire Hathaway owns, probably will lift the company's earnings per share (EPS) over the long haul. In other words, share buybacks are making Buffett's company even more attractive to value-oriented investors.
