68% of Warren Buffett’s $334 Billion Portfolio is Invested in Only 4 Stocks

If you’ve ever wondered why investors pay so much attention to what Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett is buying and selling, I can offer nearly 3.8 million reasons.

Since the Oracle of Omaha took over the role of CEO in 1965, he’s created more than $680 billion in value for his company’s shareholders (himself included) and delivered an aggregate return on Berkshire’s Class A shares (BRK.A) of 3,787,464%. That’s 153 times better than the 24,708% total return, including dividends paid, for the widely followed S&P 500 over the same stretch.

Investors are constantly dissecting Buffett’s strategy with the hope of replicating even a fraction of his outperformance. While many of Buffett’s investing traits are well known and credited for his success, such as buying for the long haul and gravitating to dividend stocks, it’s his penchant for portfolio concentration that’s really paid off.

With the belief that diversification is only necessary if you don’t know what you’re doing, Warren Buffett has put a whopping 68% of Berkshire Hathaway’s $334 billion investment portfolio to work in only four stocks.

Apple: $138.3 billion (41.4% of invested assets)
In the Oracle of Omaha’s letter to shareholders published last year, he referred to tech stock Apple (AAPL) as one of Berkshire Hathaway’s “four giants.” Given that this position comprises more than 41% of Berkshire’s invested assets, calling it a “giant” is a fair assessment.

Although Apple’s supercharged growth days are now in the past, it continues to be a cash-flow juggernaut driven by innovation. For more than a decade, Apple’s physical products have endeared consumers to its brand. Since launching a 5G-capable iPhone during the fourth quarter of 2020, it’s been able to command around half of U.S. smartphone market share.

Sales of Mac personal computers (PCs) have been climbing, too. After consistently accounting for between 11% and 13% of global PC shipment share for the past nine years, Mac PC shipments jumped to a greater than 17% worldwide share in late 2022.

Warren Buffett and his investment team also appreciate Apple’s management team. CEO Tim Cook is spearheading an ongoing transformation that’s emphasizing subscription services. Subscriptions tend to have high margins and can play a key role in minimizing revenue fluctuations when Apple is upgrading one or more of its physical products.

But it’s Apple’s capital-return program that really gains praise from Buffett. Apple has repurchased in excess of $550 billion of its shares over the past decade and is doling out of the largest nominal-dollar dividends in the world.

Bank of America: $35.3 billion (10.6% of invested assets)
There’s no sector Buffett enjoys putting Berkshire Hathaway’s money to work in more than financials. At the moment, no bank stock is more beloved than Bank of America (BAC). Aside from Apple, it’s the only other stock to account for a double-digit percentage of Berkshire’s invested assets.

The attraction to bank stocks is that they’re natural moneymakers — as long as you’re patient. Even though banks are cyclical and recessions are an inevitable part of the economic cycle, banks are able to grow their loans and deposits over time and take advantage of the natural expansion of the U.S. economy.

Bank of America’s secret sauce is its interest rate sensitivity. With the Federal Reserve raising interest rates at the fastest pace in four decades, no large bank is seeing a larger benefit than BofA. These rate hikes are adding billions of dollars in net interest income each quarter — and the nation’s central bank isn’t done hiking rates.

Despite its seemingly stodgy disposition, Bank of America is also improving its operating efficiency through investments in digitization. Nearly half of its total sales were completed online or via mobile app during the fourth quarter. As more people shift to online/mobile banking, BofA will have the option of consolidating some of its physical branches and reducing its operating expenses.

What’s more, bank stocks tend to handsomely reward their shareholders during economic expansions. It’s not abnormal for BofA to return $20 billion per year (or perhaps far more) via dividends and share buybacks.

Chevron: $27.6 billion (8.3% of invested assets)
Though energy stock Chevron (CVX) is one of the newer additions to Berkshire Hathaway’s portfolio (held since the fourth quarter of 2020), it wasted no time becoming one of Buffett’s largest holdings.

The likeliest reason Buffett and his investing lieutenants, Ted Weschler and Todd Combs, piled into Chevron is the belief that oil prices would remain elevated for years to come. While a lot of attention has been paid to Russia’s invasion of Ukraine and the supply issues this invasion creates for Europe, COVID-19 is a far bigger catalyst.

Three years of demand uncertainty tied to COVID-19 caused oil and gas companies to pare back their capital expenditures. As a result, crude oil supply is expected to be constrained for years to come. Supply and-demand economics suggests this will provide a lift to the spot price of oil.

Though Chevron brings in its juiciest margins from drilling, the Oracle of Omaha can appreciate that it’s an integrated operator. Chevron owns transmission pipelines, refineries, and chemical plants, which help it generate predictable cash flow, as well as partially hedge against lower crude oil prices.

Among global energy majors, Chevron is also arguably the top dog when it comes to balance sheet health. Substantially higher energy commodity prices allowed Chevron to reduce its net debt in 2022 from $25.7 billion to $5.4 billion.

And big oil is known for its sizable capital-return programs. Chevron has increased its base annual dividend for 36 consecutive years, and its board recently authorized an up to $75 billion share repurchase program.

American Express: $27.2 billion (8.1% of invested assets)
The fourth stock that, with Apple, BofA, and Chevron, collectively accounts for 68% of Berkshire Hathaway’s $334 billion of invested assets is credit-services provider American Express (AXP). AmEx is Buffett’s second longest-held stock — 30 years, and counting.

The macro thesis that guides Buffett’s love of bank stocks pertains to American Express as well. Even though AmEx is susceptible to weakness during recessions, long-winded periods of expansion allow it to grow in lockstep with the U.S. and global economy.

But it’s American Express’s ability to double-dip that can really supercharge its growth prospects during bull markets. In addition to being one of the largest payment processors in the U.S., AmEx is also a lender. This allows it to collect fees from merchants, as well as annual fees/interest income from its cardholders.

The downside to playing both sides of the fence is that, as noted, AmEx is exposed to weakness during recessions. However, American Express’s target client tends to play a key role in helping it navigate turbulent waters. Specifically, AmEx does a fantastic job of courting high earners and high-net-worth individuals.

High earners are less likely than the typical consumer to adjust their spending habits or fail to pay their bill when the U.S. or global economy falters. In other words, American Express can bounce back quicker than a lot of lenders from a bumpy economic outlook.

Lastly, AmEx has a rock-solid capital-return program. Given Berkshire Hathaway’s exceptionally low cost basis of $8.49 per share of AmEx, the $0.60 quarterly dividend American Express will soon be paying out equates to a better than 28% yield on cost.

— Sean Williams

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Source: The Motley Fool