Two sensational, proven businesses account for more than half of the investment assets Oracle of Omaha oversees at Berkshire Hathaway.
If you’ve ever wondered why over 40,000 people show up; berkshire hathaway‘s (BRK.A 0.72%) (BRK.B 0.51%) At each annual shareholder meeting, look no further than the track record of longtime CEO Warren Buffett.
Affectionately known as the “Oracle of Omaha,” he has overseen returns of more than 4,900,000% of his company’s Class A stock (BRK.A) since becoming CEO in the mid-1960s. Returns like this are sure to attract the attention of asset managers on Wall Street.
Enormous books have been written discussing the “recipes” Buffett and Berkshire’s long-term shareholders used to increase their wealth, but one of the factors that played the biggest role in his investing success is undoubtedly This is portfolio concentration.
Berkshire Hathaway CEO Warren Buffett. Image source: Motley Fool.
As of the closing bell on April 26, 2024, Berkshire’s $372 billion portfolio was spread across 45 stocks and two index funds. However, only a small number of these holdings account for the majority of invested assets. Mr. Buffett and his top investment aides, including the great Charlie Munger, had long believed, until his recent death, that their best ideas deserved more attention.
These two great companies currently make up 52% of the $372 billion portfolio overseen by Warren Buffett at Berkshire Hathaway.
Apple: Market capitalization $153.3 billion (41.2% of invested assets)
Probably the largest holding (1 mile at a time!) Warren Buffett’s portfolio, tech stocks apple (AAPL 2.20%)is a company he referred to at Berkshire Hathaway’s 2023 annual shareholder meeting as “a company that is better than any other company we own.” Apple accounts for over 41% of his investment assets.
Warren Buffett’s love for Apple as an investment and business boils down to four things: branding, innovation, management, and return on capital.
Regarding the former, Apple has the most loyal customers on the planet and is recognized as one of the most valuable global brands. This royalty goes a long way in generating predictable sales and cash flow each year.
Second, Apple is an innovator in many ways. Most people are rightly familiar with the company’s success as the inventor/producer of physical products such as the iPhone, Mac, iPad, and Apple Watch. Since launching a 5G-enabled version of the iPhone in the fourth quarter of 2020, Apple has controlled at least half of the domestic smartphone market share.
But Apple also innovates beyond physical products. The company is in a multi-year transition focused on subscription services. The service-driven model should improve operating margins, generate predictable cash flow in any economic climate, and smooth out the sales fluctuations traditionally associated with major iPhone upgrade cycles.
The third reason Warren Buffett has no intention of giving up his huge stake in Apple is the company’s top management. CEO Tim Cook is trusted by consumers and Wall Street and is the brains behind Apple’s service transformation.
Finally, Apple’s capital return program is unparalleled among publicly traded companies. In addition to distributing $14.8 billion in dividend income to shareholders each year, the board has greenlit $651 billion worth of common stock buybacks since early 2013. Put another way, Apple has spent more on stock buybacks over the past decade. The number of years and change is greater than the market capitalization of all but 8 companies. S&P500 Businesses are one of them.
For Buffett, stock buybacks have a dual benefit. With net income stable or increasing, he could reduce Apple’s number of outstanding shares, increasing earnings per share (EPS) and giving it a more attractive valuation. Moreover, his stock buybacks have increased Berkshire’s Apple stake without a word from Buffett or his top aides.
Image source: Getty Images.
Bank of America: $39.1 billion market cap (10.5% of invested assets)
Another great stock, along with Apple, is the Goliath of the money center, accounting for 52% of Warren Buffett’s $372 billion portfolio at Berkshire Hathaway. american bank (BAC -0.19%)commonly referred to as “BofA”.
There’s no area Oracle of Omaha likes to put its capital into more than finance. The reason is simple: it is cyclical.
Recessions are a normal and inevitable part of the economic cycle. But Berkshire’s best investment minds are keenly aware that the downturn won’t last long. Since 1945, he has seen only three recessions that lasted at least 12 months, none lasting longer than 18 months.
On the other hand, most periods of expansion have lasted multiple years, including two periods of rapid growth that lasted more than a decade. Bank stocks can take advantage of this prolonged economic expansion by expanding their loan portfolios.
Perhaps no money center bank is better positioned than Bank of America in the current economic climate. Among the largest U.S. banks by assets, it is the most sensitive to changes in interest rates. The Fed’s most aggressive rate hike cycle since his early 1980s has generated billions of dollars in additional interest income for BofA each quarter. If inflation remains high and the Fed is forced to delay its rate-cutting cycle, Bank of America should benefit disproportionately.
Bank of America’s continued investments in technology are paying off as well. The company has successfully moved 76% of consumer households to digital banking and completed 50% of all consumer loan sales online or via mobile apps during the quarter ended March. . For banks, digital transactions are significantly cheaper than face-to-face interactions. As digital banking adoption increases, BofA’s operational efficiency should improve as well.
Bank stocks are also known for having strong capital return programs. When the U.S. economy is expanding, it’s not uncommon for Bank of America’s board to return more than $20 billion a year to shareholders through dividends and stock buybacks.
Warren Buffett has no incentive to sell Berkshire Hathaway’s Bank of America stock anytime soon.
