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By Sean Williams, Fool.com
When it comes to billionaire money managers, Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett is on a pedestal of his very own.
Since taking the reins at Berkshire Hathaway in the mid-1960s, the affably dubbed “Oracle of Omaha” has overseen an aggregate return in his company's Class A shares (BRK.A) of a scorching-hot 5,422,618%, as of the closing bell on July 17. On an annualized total return basis covering nearly six decades, he's practically doubled up the benchmark S&P 500, including dividends paid.
Buffett's secret to success is really no secret at all. He's plainly stated on multiple occasions that he seeks out time-tested businesses that have well-defined competitive advantages and strong management teams.
However, nowhere near enough credit for Berkshire Hathaway's long-term success is given to Buffett's penchant for portfolio concentration. Even though he and his top investment aides, Ted Weschler and Todd Combs, are currently overseeing a 44-stock, $416 billion investment portfolio at Berkshire, they all strongly believe in putting an outsized amount of capital to work in their best ideas.
The following five unstoppable stocks, which account for 75% of Berkshire Hathaway's invested assets ($309.9 billion), are truly Buffett's best ideas (market values are as of the closing bell on July 17).
1. Apple: $180,670,650,836 (43.4% of invested assets)
Any doubts about Warren Buffett's preference to concentrate his company's invested assets into a few premier businesses are tossed aside by Berkshire's stake in tech stock Apple (AAPL). Even following two consecutive quarters where Buffett and his crew lightened their load on Apple, this top holding still accounts for more than 43% of Berkshire's investment portfolio.
The driving force for Apple as an investment has long been its innovative capacity. For instance, Apple has accounted for 50% or more of domestic smartphone market share since introducing a 5G-capable iPhone in the latter half of 2020.
But there's more to the largest publicly traded company than just physical product innovation. CEO Tim Cook is currently overseeing the evolution of his company to a platform-focused operating model. Though Apple has no intention of phasing out the physical products (iPhone, Mac, iPad, and Apple Watch) that endeared its brand to consumers, it's placing greater emphasis on higher-margin subscriptions designed to enhance customer loyalty and minimize the sales fluctuations that typically accompany iPhone upgrade cycles.
I'd be remiss if I didn't also mention Apple's market-leading capital-return program. The world's largest publicly traded company by market value has repurchased $674 billion of its common stock since initiating a buyback program in 2013. Buffett is a huge fan of share repurchases.
2. Bank of America: $45,424,831,224 (10.9% of invested assets)
The second-largest position in the Oracle of Omaha's $416 billion investment portfolio at Berkshire is none other than money-center goliath Bank of America (BAC), which is commonly known as “BofA.”. Buffett and his team oversee more than 1.03 billion shares of BofA stock, equating to a 13.2% stake in the company.
There's not a sector Warren Buffett enjoys putting his company's capital to work in more than financials. But his favoritism for BofA might have everything to do with its interest rate sensitivity. The Federal Reserve's most-aggressive rate-hiking cycle since the early 1980s has added billions of dollars in net-interest income to Bank of America's bottom line.
But did you know that Bank of America has also made significant strides with its digitization efforts? Through the midpoint of 2024, 77% of consumer households were banking digitally, while 53% of all consumer loan sales were completed online or via mobile app. This is up nine percentage points from the comparable period three years ago. Digital transactions are considerably cheaper for banks than in-person interactions, which should improve BofA's operating efficiency over time.
Lastly, Bank of America's board approved a $0.02-per-share increase to the company's quarterly dividend following the latest round of Fed stress tests. This hike increases Berkshire's annual dividend income from its stake in BofA to more than $1 billion!
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3. American Express: $37,896,610,572 (9.1% of invested assets)
Have I mentioned that Warren Buffett is a big fan of financial stocks? If not, credit-services provider American Express (AXP) occupying the third spot in Berkshire's portfolio should drive this point home. AmEx, as American Express is referred to in shorthand, has been a continuous holding by Buffett's company since 1991.
What's made AmEx such a long-term winner has been its ability to benefit from both sides of the transaction aisle. For instance, it's the No. 3 payment processor by credit card network purchase volume in the U.S. But it's also a lender, as evidenced by the American Express credit cards consumers and businesses use to facilitate transactions. AmEx is able to generate fees from merchants for processing transactions, as well as annual fees and interest income from its cardholders.
Additionally, American Express has always been particularly good at attracting high earners as cardholders. The well-to-do are less likely than the average working American to alter their buying habits or fail to pay their bills during minor economic disruptions. On paper, AmEx is in better position to navigate periods of economic turbulence than its peers.
Since Berkshire's cost basis for its stake in AmEx is only $8.49 per share, Buffett is overseeing a 33% annual yield, relative to cost, on this position.
4. Coca-Cola: $26,084,000,000 (6.3% of invested assets)
If you thought American Express was a longtime holding of Warren Buffett, let me introduce you to beverage behemoth Coca-Cola (KO), which has been a pillar for the Oracle of Omaha since 1988!
Branding is a key reason Coca-Cola has been such a steady performer for decades. According to the annually released “Brand Footprint” report from Kantar, Coca-Cola has been the most-chosen brand from retail shelves by consumers for 12 consecutive years. Selling a product (beverages) that's considered a basic necessity leads to consistent and predictable operating cash flow year after year.
It also doesn't hurt that Coca-Cola offers almost unparalleled geographic diversity. With the exception of North Korea, Cuba, and Russia (the latter has to do with its invasion of Ukraine), Coke has ongoing operations in all other countries. This allows it to take advantage of organic growth opportunities in emerging markets, while generating predictable cash flow in developed countries.
Coca-Cola's dividend is an undeniable lure, as well. Berkshire's cost basis for its 400,000,000-share stake in Coca-Cola is only $3.2475 per share, which means Coke's base annual payout of $1.94 translates into a 60% yield on cost for Buffett's company.
5. Chevron: $19,828,098,775 (4.8% of invested assets)
Buffett's fifth-largest holding, which collectively with Apple, Bank of America, American Express, and Coca-Cola accounts for 75% of Berkshire Hathaway's $416 billion of invested assets, is energy titan Chevron (CVX).
Throughout the first two decades of this century, energy stocks played a minimal role in Berkshire's portfolio. But since this decade began, Buffett has shown a clear liking to Chevron, as well as Occidental Petroleum.
Having nearly $20 billion devoted to Chevron is a crystal-clear indication that Berkshire's brightest minds expect the spot price for crude oil to remain elevated. Roughly three years of reduced capital expenditures by global energy companies (including Chevron) during the COVID-19 pandemic has led to tight worldwide supply of this key commodity. As long as crude oil supply remains constrained, there's a good chance we'll see its spot price hold above its historic average.
Chevron is also an integrated operator, which helps to protect its operating cash flow in pretty much any economic climate. Although it generates its beefiest margins from its upstream drilling segment, a declining spot price for crude lowers input costs for Chevron's refineries and chemical plants.
The final piece of the puzzle is Chevron's phenomenal capital-return program. The company's board approved a $75 billion share repurchase program in January 2023, and has green-lit 37 consecutive years of dividend increases.
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