For almost 60 years, the Oracle of Omaha has been dazzling Wall Street. I'm talking about Berkshire Hathaway's (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett. Since taking over as CEO in the mid-1960s, he has overseen a greater than 4,760,000% gain in his company's Class A shares (BRK.A). A seven-digit return is certainly going to get a money manager noticed -- and for good reason.
What makes Warren Buffett such a hero for everyday investors is his willingness to share his insights on the U.S. economy and investing. Lengthy books have been written that discuss some of his favorite investing philosophies, such as buying stakes in brand-name businesses with sustainable moats and holding these positions for lengthy periods.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
However, the factor that isn't given nearly enough credit for Berkshire Hathaway's long-term success is portfolio concentration. Warren Buffett and his top investing aides, Todd Combs and Ted Weschler, strongly believe in putting the lion's share of Berkshire's capital to work in their top ideas. And if these top ideas generate sizable returns, Berkshire Hathaway's stock is likely headed even higher.
Despite Berkshire having stakes in 49 stocks, as of Sept. 30, 2023, 64% of the invested assets ($236.1 billion) Warren Buffett oversees in Berkshire Hathaway's $371 billion portfolio are being put to work in just three brand-name companies.
Apple: $170.2 billion (45.9% of invested assets)
Any question of whether or not the Oracle of Omaha and his team favor portfolio concentration is made crystal clear by tech stock Apple (AAPL -0.35%), which accounts for nearly 46% of Berkshire's invested assets. This Apple stake amounts to 20% of Berkshire Hathaway's market cap, which means the health of Apple and its stock very much matters to Berkshire Hathaway's investors.
The three factors that are likely most responsible for luring Warren Buffett, Todd Combs, and Ted Weschler into such an outsized position in Apple are its brand, its ongoing innovation, and its market-leading capital-return program.
In most annual brand rankings, Apple comes out on top. It has an exceptionally loyal customer base that allows the company to generate highly predictable operating cash flow. Predictability is rare in the tech sector, which is one of the reasons Apple has so consistently outperformed.
Berkshire's investment team is likely also enamored with Apple's innovation. It's been the undisputed leader in U.S. smartphone market share for years and was on the cutting edge of innovation when it introduced the iPad in 2010.
Beyond the company's physical product innovation, investors are witnessing CEO Tim Cook transform Apple into a services-focused business. A subscription-driven platform will not only enhance customer loyalty and Apple's operating margin over time, but it'll also help smooth out the sales fluctuations that tend to occur during major iPhone upgrade/replacement cycles.
But for Warren Buffett, Apple's capital-return program might be the top selling point. On top of returning around $15 billion annually to shareholders via dividends, Apple has repurchased more than $600 billion worth of its common stock since initiating a buyback program in 2013. Buffett loves buybacks because they increase Berkshire's ownership stake without him or his team lifting a finger.
Bank of America: $34.6 billion (9.3% of invested assets)
Although it sits a long way behind Apple, money-center giant Bank of America (BAC -0.21%) is Berkshire Hathaway's second-largest holding at $34.6 billion in market value.
Out of the 11 sectors of the stock market, there's none Warren Buffett is more knowledgeable about than financials. Within financials, bank stocks are the real area of focus.
Interestingly enough, the reason the Oracle of Omaha and his aides have bet big on companies like BofA is because they're cyclical. This is to say that Bank of America is going to succeed and struggle in lockstep with the U.S. economy.
Even though recessions are a normal and inevitable part of the economic cycle, they don't last very long. Instead of trying to foolishly guess when these downturns will occur, Buffett and his investing squad have angled Berkshire's $371 billion portfolio to take advantage of long-winded expansions. In Bank of America's case, it's able to steadily grow its loan and lease portfolio over time.
What really separates Bank of America from countless other publicly traded banks is that it's the most interest-rate sensitive among U.S. money-center banks. Since March 2022, the most aggressive rate-hiking cycle in four decades has added billions of dollars in quarterly net interest income to BofA's bottom line.
Furthermore, Bank of America is enjoying the tangible reward of investing in technology. The company's digitization efforts have increased the percentage of households banking online or via mobile app to 75%, as of Dec. 31, 2023. Digital transactions are considerably cheaper than in-person interactions for banks, which should be a positive for BofA's long-term operating efficiency.
Let's not forget that the Oracle of Omaha also loves a good value. Bank of America stock is trading for less than 10X forward-year earnings and can be purchased for right around its book value.
Image source: American Express.
American Express: $31.3 billion (8.4% of invested assets)
The third stock that, along with Apple and Bank of America, collectively makes up 64% of the $371 billion investment portfolio Warren Buffett oversees at Berkshire Hathaway is credit-services provider American Express (AXP -0.62%). "AmEx," as the company is more commonly known, has been a continuous holding by Berkshire since 1991.
To reiterate, Warren Buffett loves financial stocks and cyclical businesses. Even though there have been 12 U.S. recessions since the end of World War II, only three of these downturns managed to hit the 12-month mark, and none surpassed 18 months. Disproportionately long periods of expansion have allowed credit-services companies like American Express to thrive.
The primary reason AmEx has been such a great investment for so long is its ability to benefit from both sides of a transaction. On one hand, it's the No. 3 payment processor by credit card network purchase volume in the U.S. (i.e., the largest market for consumption in the world). This means it's generating a healthy amount in fees from merchants by facilitating transactions.
However, American Express is also a lender. Its cardholders are paying interest on their carried credit card balances, along with (possible) annual fees to be a cardholder. During long periods of economic growth, double-dipping can be quite fruitful for the company's bottom line.
Another reason AmEx outperforms is the clientele it tends to attract. American Express has always had a knack for luring high-earning cardholders.
Although high earners aren't perfect, they're far less likely than the average consumer to alter their buying habits or fail to pay their bills during a modest economic contraction. In other words, the well-to-do are helping AmEx successfully navigate potentially challenging economic climates.
I'd be remiss if I didn't also mention that American Express has quietly turned into a mammoth dividend stock for Berkshire Hathaway. AmEx recently announced plans to increase its base annual payout to the equivalent of $2.80 per share. Though this represents a mere 1.36% nominal yield, based on where shares closed on Feb. 2, a $2.80 annual dividend is a 33% yield to Berkshire's cost basis of roughly $8.49 per AmEx share.
Berkshire Hathaway is on pace to generate around $6 billion in dividend income this year, with AmEx certainly doing its part.
