Berkshire Hathaway's stock portfolio is a great source to find outstanding businesses that have won the approval of one brilliant investor.
Since 1965, Berkshire Hathaway CEO Warren Buffett has delivered a phenomenal return of 3,787,464% through 2022. It's an extraordinary record of growth that resulted from a combination of two things: Buffett's purchases of businesses outright and purchases of small pieces of quality companies through the stock market.
At the end of the third quarter, Berkshire's combined investment in Apple (AAPL -0.35%), Occidental Petroleum (OXY -0.15%), and Mastercard (MA 0.07%) had a grand total of nearly $173 billion, with Apple making up most of that. Here's why any one of these top stocks would be great places to park some cash to start the new year.
1. Apple
Apple is Berkshire's largest holding, worth $156 billion at the end of the third quarter. Berkshire last added to its Apple stake in the first quarter of 2023, but the stock is up only 12% since the end of March, so it's not far above where Buffett himself or one of his investing deputies might have been buying more shares.
Buffett has long been an advocate of buying companies with a clear competitive advantage over rivals. He also places a high value on companies that generate profits that can be reinvested in the business at high rates of return. Apple certainly passes the latter test, earning an extraordinary return on invested capital of 56%.
Buffett admires Apple's ability to make products that people can't live without. It has won over millions of loyal customers, if not billions, with the installed base of devices doubling over the last seven years to 2 billion.
Customers who spend thousands of dollars on Apple's products are then spending more on apps, subscriptions, iCloud storage plans, AppleCare warranties, and other services, which generate much higher margins than iPhones. Services revenue has been the company's fastest-growing business in recent years, and this is contributing to a growing mountain of cash to distribute to shareholders.
Apple generated $99 billion in free cash flow (FCF) over the last year, and it distributed about 15% of that to shareholders in quarterly dividend payments, with $77 billion going toward share buybacks. Buffett loves companies that generate lots of FCF and then use that cash to buy back shares. This reduces a company's total shares outstanding, and therefore increases Berkshire's percentage of ownership in the company.
Apple's brand, high margins, and high return on invested capital are great reasons to buy shares this month. Look for these qualities to lift the stock to new highs over the next few years and beyond.
2. Occidental Petroleum
Buffett's Berkshire has been building a large stake in top oil and gas producer Occidental Petroleum over the last few years. The company bought more shares in December, bringing Berkshire's percentage ownership in the company to 34%.
As an energy company that derives most of its revenue from drilling, Occidental has financial results that can swing with the price of oil. The spot price in the benchmark West Texas Intermediate (WTI) crude has fallen 8% over the last year, which has weighed on the stock price lately.
But Berkshire clearly likes the direction in which Occidental is moving. Occidental generated $6.9 billion in FCF over the last four quarters, despite lower oil prices. That is nearly three times what it produced five years ago.
Free cash flow has fallen over the last year with oil prices, but Occidental's management is making moves to keep growing FCF. In December, Occidental announced an agreement to acquire oil and gas producer Crownrock for $12 billion. While the acquisition will add to Occidental's debt burden (it ended the third quarter with $19 billion of net debt), Crownrock will also immediately benefit the company's FCF, which will prove valuable if oil prices slip.
Occidental has been using excess cash flow to pay down debt, buy back shares, and pay dividends -- all shareholder-friendly moves. The stock currently pays a dividend yield of 1.25% and trades at a cheap 8 times trailing FCF, which makes it clear why Berkshire was recently buying shares.
3. Mastercard
Mastercard stock has been a phenomenal investment for Berkshire, which held over $1.5 billion worth of the credit card brand's shares at the end of September. The stock has climbed 119% since 2019 and has a lot more upside over the long term.
More use of digital payment services has been a boon for leading credit card brands. It has driven more opportunities for a brand like Mastercard to become just a tap away for online and in-store payments. The company has a massive reach with 3.3 billion cards outstanding worldwide, driving over 37 billion transactions in the third quarter alone.
The growth of digital payments over the last decade helped drive consistent double-digit increases in revenue and earnings. Mastercard is still going strong with revenue up 11% year over year on a currency-neutral basis in the third quarter.
One explanation for Mastercard's strong growth is that it doesn't have the risks of traditional financial institutions. It doesn't issue cards to consumers or carry any credit risk on its balance sheet.
Instead, it operates as a payments processor, and this business model translates to very high margins and a formidable competitive moat, since it would be too expensive to duplicate a global payment network that handles billions of transactions.
The business has grown FCF by 14% per year over the last decade. That growth has led to consistent increases in the dividend and share buybacks. In fact, Mastercard has returned all FCF to shareholders through dividends and buybacks in recent years.
Mastercard still sees a lot of opportunities to expand acceptance of digital payments around the world, which could spell several more years of strong earnings and FCF growth. The stock returned over 400% cumulatively to shareholders over the last decade, and the next 10 years could see a similar result.
