You could say Warren Buffett knows a thing or two about investing. Since he took over as CEO of Berkshire Hathaway (BRK.A -0.40%)(BRK.B 0.06%) in 1965, he’s overseen the creation of more than $700 billion in value for shareholders (himself included), and delivered an aggregate return on the company’s Class A shares (BRK.A) of 3,905,994% through May 3, 2022.
Although there are numerous reasons for the Oracle of Omaha’s success over nearly six decades, his lack of diversification really stands out. Buffett firmly believes that diversification is only necessary if you don’t know what you’re doing. Despite Berkshire Hathaway holding around four-dozen securities in its investment portfolio, Buffett has nearly $263 billion — 73% of Berkshire’s almost $358 billion portfolio — invested in just five stocks.
Apple: $144.7 billion
First up is technology kingpin Apple (AAPL 0.47%), which Buffett considers one of Berkshire Hathaway’s “giants.” Apple accounts for nearly $145 billion in market value and a little over 40% of Berkshire Hathaway’s invested assets.
Keep in mind that Buffett also mentioned to CNBC this past weekend that he’d purchased an additional $600 million of Apple stock during the first quarter. (This buy hasn’t been added to the above $144.7 billion figure.)
Apple has everything the Oracle of Omaha absolutely loves. It’s one of the most recognized brands in the world, has an exceptionally loyal customer base, and has relied on innovation to grow its sales for more than a decade. During the fourth quarter, Apple’s iPhone had a 34-percentage-point share lead over Samsung in the United States. The introduction of 5G capability to iPhone helped push sales and profits to record highs.
Apple has a strong leader in CEO Tim Cook, as well. Cook is overseeing a multiyear transition that has Apple becoming more of a services player. Leaning on subscription services should help reduce the revenue lumpiness associated with product replacement cycles.
I’d also be remiss if I didn’t note Apple’s monstrous capital-return program. The company pays out one of the largest nominal dividends, and it recently announced a $90 billion boost to its share-buyback program. Warren Buffett is a huge fan of companies that repurchase their own stock on a regular basis.
Bank of America: $38.3 billion
Buffett has also bet big on Bank of America (BAC -0.24%). Berkshire Hathaway’s BofA stake (over 1 billion shares) totals more than $38 billion and accounts for 10.7% of invested assets.
Whereas tech stocks have never really been Warren Buffett’s thing, bank stocks like BofA are right in his wheelhouse. The Oracle of Omaha particularly appreciates the cyclical nature of the banking industry.
Even though recessions are an inevitable part of the economic cycle, they generally last for no longer than a few months to a couple of quarters. By comparison, periods of economic expansion can go on for many years. Buffett, who focuses on the long term, is simply allowing this numbers advantage to work to his (and his shareholders’) advantage.
Something else interesting about Bank of America is its interest-rate sensitivity. With the nation’s central bank expected to raise interest rates significantly in 2022 and into 2023, no money-center bank should benefit more than BofA. According to the company, a 100 basis-point parallel shift in the interest-rate yield curve over the next 12 months is estimated to add $5.4 billion in net interest income.
In addition, Buffett appears to be a fan of CEO Brian Moynihan. Although big banks need approval from the Federal Reserve before paying dividends and repurchasing shares, Moynihan has pushed for hefty capital-return programs in the past.
Chevron: $28.3 billion (estimated)
A third massive holding in Warren Buffett’s portfolio that comes as a bit of a surprise is integrated oil and gas stock Chevron (CVX 2.67%). Berkshire’s first-quarter operating results noted a fair value of “$25.9 billion” assigned to Chevron, as of March 31, 2022. The $28.3 billion value above is probably very close, but nevertheless “estimated” until we get a closer look at Berkshire’s 13F filing for the first quarter.
Why load up on Chevron? The most obvious reason is that Buffett may believe that oil and natural gas prices will remain elevated for an extended period of time. The Ukraine-Russia war has shown no signs of a resolution, and the COVID-19 pandemic continues to disrupt supply chains globally. In other words, inflationary pressures persist.
Another possible reason Chevron was so attractive to Buffett and his investing team is its integrated operations. While drilling and exploration is the bread and butter for oil stocks, being integrated means being able to lean on the company’s midstream (e.g., transmission pipelines and storage) and downstream assets (e.g., refineries and chemical production) when crude and gas prices falter. These sectors can help Chevron hedge against even the darkest times in the energy sector.
Then again, the Oracle of Omaha might be doing some capital-return chasing, too. Chevron is paying out a hearty 3.5% yield, and the company announced plans to a repurchase $10 billion worth of its common stock before the end of the year.
American Express: $26.1 billion
A company that isn’t a surprise to see on this list is credit-services provider American Express (AXP -2.26%). AmEx has been a continuous holding for Berkshire Hathaway since 1993, with a position value of $26.1 billion, as of May 3.
Buffett’s fascination with American Express has to do with its cyclical ties and ability to take advantage of an expanding U.S. and global economy. AmEx is what I refer to as a “double dipper.” Not only does it charge processing fees to merchants, but it also acts as a lender.
This allows the company to collect net interest income and fee-based revenue from cardholders. Even though loan delinquencies rise during recessions, AmEx spends far more time in the sun than under gray clouds.
American Express is also unique for its success in courting a more affluent clientele. Well-to-do consumers are less likely to alter their shopping habits or fail to make their payments when minor economic hiccups arise. This helps AmEx better cope with downturns when they do arrive.
Not to sound like a broken record, but I’d bet the farm that Buffett is pretty happy with the company’s dividend, as well. Berkshire’s annual yield on AmEx, relative to its $8.49 cost basis, is a staggering 24.5%!
Coca-Cola: $25.2 billion
Last, but certainly not least, is beverage giant Coca-Cola (KO 0.36%). Coke is Berkshire Hathaway’s longest-tenured investment (34 years), with the 400 million shares held worth about $25.2 billion, as of May 3.
Similar to Apple, Coca-Cola is one of the most-recognized brands in the world. Savvy marketing has allowed the company to cross generational gaps to engage with consumers. This includes everything from Coke’s holiday tie-ins to its social media advertising campaigns featuring well-known celebrities and athletes.
In addition to its marketing prowess, Coca-Cola’s success is dependent on its geographic diversity. This is a company with a presence in all but three countries worldwide (North Korea, Cuba, and Russia — the latter being due to the ongoing war in Ukraine).
Coke holds a 20% share of the cold-beverage market in developed countries, along with a 10% share in emerging markets. In other words, the company can count on highly predictable cash flow in developed regions, while leaning on emerging markets for an organic-growth boost.
Warren Buffett has also watched Coca-Cola’s payout bubble higher over the past 34 years. Since Berkshire’s cost basis on Coca-Cola is approximately $3.25, Coke’s $1.76 base annual payout works out to a yield on cost of 54.2%! There’s absolutely no reason for the Oracle of Omaha or his investing team to ever sell this position with annual yields like this.