Who needs diversification? Not Warren Buffett!
Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) CEO Warren Buffett has produced a handful of jaw-dropping numbers over the years. For example, the Oracle of Omaha, as he’s come to be known, has led Berkshire Hathaway stock to a 20.3% annual average return over the past 55 years. In aggregate, this works out to a gain of 2,744,062%. Put another way, $100 invested in 1965 into Berkshire Hathaway stock would have been worth over $2.7 million by Dec. 31, 2019.
But this isn’t the most surprising Buffett statistic of all. Though Warren Buffett and his team do invest in dozens of companies, Berkshire remains concentrated in only a few key names. As of the closing bell on Oct. 8, 78.4% of Berkshire Hathaway’s invested assets (almost $188 billion) were tied up in only five stocks.
Apple: $115.4 billion
In Warren Buffett’s view, Apple (NASDAQ:AAPL) has become a third company within Berkshire Hathaway. It accounts for almost half of Berkshire’s invested assets and has generated close to $80 billion in unrealized gains for the Oracle of Omaha (not counting dividends paid).
When investors buy into the Apple growth story, they know exactly what they’re getting. The iPhone remains the smartphone of choice within the U.S., and will more than likely be a key growth driver in late 2020 and early 2021 as Apple prepares to unveil its next-generation 5G device. With telecom providers scaling up their wireless infrastructure upgrades, this has the potential to be a multiyear uptick in iPhone sales for Apple.
Apple CEO Tim Cook is also overseeing the company’s transformation into big-time services provider. Services offer juicy margins and have been growing by a double-digit rate.
Buffett is also a huge fan of Apple’s capital return program. Even though its yield of 0.7% leaves a lot to be desired, Apple is paying out in the neighborhood of $14 billion annually in dividends, and has aggressively repurchased its own stock.
Bank of America: $26.1 billion
Generally speaking, Berkshire Hathaway’s ownership stake in bank stocks caps at 10%. That’s because a stake above 10% would mean being classified as a bank holding company by the Federal Reserve, which could come with a host of restrictions. But with the blessing of the Federal Reserve Bank of Richmond, Buffett and his team has been given the OK to take their stake in Bank of America (NYSE:BAC) up to as much as 24.9%.
It’s no secret that Buffett is a big fan of bank stocks, primarily because they’re long-term moneymakers. The Oracle of Omaha often fills Berkshire Hathaway’s portfolio with cyclical companies that’ll be able to take advantage of long stretches of economic growth. Bank of America certainly fits that bill as possibly the most interest-sensitive of all money-center banks. When the Fed does choose to begin raising rates, BofA will be a key beneficiary.
Bank of America has also done an excellent job of controlling its noninterest expenses in recent years. As digital and mobile banking have grown, BofA has chosen to close a small percentage of its physical branches to reduce its expenditures.
Coca-Cola: $20.2 billion
Beverage giant Coca-Cola (NYSE:KO) is the longest-tenured holding (32 years) in Berkshire Hathaway’s portfolio and is unlikely to be sold or pared down anytime soon.
The lure of Coca-Cola is twofold for Buffett. First, there’s the combination of branding and geographic reach. Coca-Cola operates in every country around the world, with the exception of North Korea and Cuba, and offers multiple ways to connect with consumers. It has Christmas tie-ins, numerous celebrity and social media ambassadors, and is arguably the most-recognized consumer-packaged goods company in the world. Coke has a significant stake in the global cold beverage market, which means few if any surprises come earnings time.
Secondly, Coke is a Dividend Aristocrat that’s making Buffett a boatload of money. Based on the $1.64 per share it’s paying out annually, and Berkshire Hathaway’s average cost basis of only $3.25, Buffett and his team are doubling their initial investment every two years.
American Express: $16.1 billion
Have I mentioned that Warren Buffett likes financial stocks? Payment services provider American Express(NYSE:AXP) is the third-longest-held stock in Berkshire’s portfolio at 27 years.
As noted earlier with Bank of America, Buffett really likes companies that can take advantage of long periods of economic expansion. As a double-dipper, AmEx is built to do exactly that. It processes transactions for merchants within its network, but also lends money to individuals and businesses, thusly reaping the reward of interest income and/or fees. Though this does expose American Express to rising loan delinquencies during recessions, economic expansions last substantially longer than periods of contraction.
Furthermore, AmEx has done a particularly good job over the years at courting affluent consumers. The well-to-do are less likely to change their spending habits during minor economic contractions, thereby allowing American Express to navigate its way through economic weakness better than some of its peers.
Kraft Heinz: $10.2 billion
Finally, there’s Kraft Heinz (NASDAQ:KHC), which might well be one of Buffett’s least impressive investments in recent years. Berkshire Hathaway owns a little over a quarter of the company’s outstanding shares.
The issue here is that Heinz overpaid for Kraft Foods in 2016, which is a big reason the combined company took a more than $15 billion goodwill writedown on a number of key brands in Feb. 2019, and slashed its dividend by 36%. Even though the pandemic has helped boost sales for some of the company’s core packaged food brands, Kraft Heinz is still lugging around $33.3 billion in goodwill and almost $29 billion in long-term debt. There’s just not much wiggle room or ability to step up spending to reignite sales growth.
If there is a bright side here, it’s that Buffett and his team are still pocketing $1.60 in dividend payouts each year. This works out to $521 million in annual dividend income for essentially standing pat, crossing your fingers, and hoping Kraft Heinz sells off some of its noncore assets to improve its financial position.
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