For nearly six decades, Berkshire Hathaway (BRK.A -0.00%) (BRK.B -0.21%) CEO Warren Buffett has been lapping the benchmark S&P 500 in the return column. As of the closing bell on March 28, 2024, the S&P 500 had gained in the neighborhood of 34,400%, including dividends paid, since Buffett took the reins. In comparison, the affably named "Oracle of Omaha" has overseen a jaw-dropping aggregate return in his company's Class A shares (BRK.A) of 5,126,746% since the mid-1960s!
Both professional and retail investors frequently await Berkshire's quarterly Form 13F filings with the Securities and Exchange Commission (SEC) to gain an understanding of what stocks Buffett and his top investment aides, Ted Weschler and Todd Combs, have been buying and selling. While Buffett is just as fallible as any other investor, he's demonstrated a knack for finding value in plain sight.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Something else Warren Buffett is known for is portfolio concentration. Even though the Oracle of Omaha and his team are overseeing a $373 billion portfolio containing 45 stocks and two index funds, the vast majority of Berkshire's invested assets have been put to work in just a few companies -- the "top ideas."
While 13Fs would give investors the impression that tech titan Apple (AAPL 2.92%) is Buffett's unquestioned favorite stock -- Berkshire's Apple stake accounts for 42% ($155 billion) of invested assets -- a deeper dive into how Berkshire Hathaway puts its cash to work points to another even more beloved stock as the Oracle's cream of the crop.
"A better business than any we own"
Let me preface this discussion by noting that Warren Buffett and his team of investors absolutely love Apple as a business. In fact, Buffett himself described Apple as "a better business than any we own" during Berkshire Hathaway's annual shareholder meeting last year. It's why an estimated $36 billion has been put to work by Buffett and Co. in shares of Apple since the start of 2016.
There are plenty of reasons for Buffett to feel the way he does about Apple. To start with, it's one of the most valuable brands globally, and it sports an exceptionally loyal customer base. A brand study conducted by SellCell.com in March 2021 notes that iPhone users are more likely to stick with Apple for their next smartphone purchase than Samsung owners are to buy another Samsung smartphone.
There's also the domestic dominance of Apple's iPhone. Since introducing an iPhone that supports 5G speeds in the fourth quarter of 2020, Apple has consistently accounted for a 50% or greater share of the U.S. smartphone market.
However, the company's future growth boils down to its shift to subscription services. Although Apple has no intention of abandoning the physical products that brought it fame (the iPhone, iPad, Mac, and Apple Watch), focusing on subscription services should provide a lift to its operating margin, enhance the value of its product and service ecosystem, and keep customers loyal to its brand.
But if you asked Warren Buffett to pinpoint the one aspect about Apple he loves most, it wouldn't be the least bit surprising if he flagged Apple's market-leading share repurchase program. Since initiating a buyback program in 2013, Apple has bought back about $651 billion worth of its common stock. Not only do buybacks help reduce the number of shares outstanding, which can provide a lift to earnings per share (EPS), they're a means to increase the ownership stakes of existing shareholders. As time passes, Berkshire is becoming a larger stakeholder in Apple without having to buy a single share.
But the fact remains that the estimated $36 billion Warren Buffett and his team have put to work in Apple over the past eight years takes a back seat to an even more loved stock.
Image source: Getty Images.
Warren Buffett has purchased more than $74 billion of this stock since 2018
Truth be told, Berkshire Hathaway's 13Fs fail to tell the full story about the company's holdings or what the Oracle of Omaha has been doing with Berkshire's cash. For a more encompassing view, investors will need to dive into Berkshire Hathaway's quarterly operating results.
Just prior to the executive certifications at the end of Berkshire Hathaway's quarterly earnings reports is a section on the company's share repurchase activity. The reason I bring this up is because Warren Buffett has spent considerably more buying back Berkshire Hathaway stock than he and his top aides have spent purchasing shares of any other stock, including Apple.
During the December-ended quarter, Buffett gave the green light for the repurchase of 3,623 shares of Berkshire's Class A stock and 660,585 shares of Class B stock (BRK.B), which came at a cost of almost $2.15 billion. Since the midpoint of 2018, Buffett and his late right-hand man, Charlie Munger, who he referred to as the "Architect of Berkshire Hathaway" in his latest annual letter to shareholders, OK'd the repurchase of more than $74 billion worth of their own company's shares. That's more than twice the amount spent buying shares of Apple.
Prior to July 2018, Berkshire's share repurchase program only allowed the Oracle of Omaha to buy shares of his company if they traded at or below 120% of book value (no more than 20% of reported book value in the most recent quarter). Since Berkshire stock never fell to or below this threshold, Warren Buffett was forced to sit on his hands and go years without repurchasing a single share.
On July 17, 2018, Berkshire's board reworked its buyback criteria:
- As long as Berkshire Hathaway has at least $30 billion in cash, cash equivalents, and Treasuries on its balance sheet; and
- Warren Buffett and the late Charlie Munger agree their stock is intrinsically cheap, buybacks can be made without any end date or ceiling.
Suffice it to say, more than $74 billion in share repurchases over the last 22 quarters makes it plainly obvious that Berkshire Hathaway is Warren Buffett's favorite stock to buy.
Since Buffett's company doesn't pay a dividend, share buybacks are the easiest way he can reward investors who share his long-term vision. These buybacks are slowly but steadily increasing the ownership stakes of Berkshire's shareholders, as well as increasing EPS. In other words, putting his company's cash to work via buybacks is making Berkshire Hathaway more attractive to fundamentally focused investors.
With a record $167.6 billion in available cash, cash equivalents, and Treasuries on the balance sheet, as of the end of 2023, Buffett has more than enough firepower to continue buying back shares of his company.
