For almost 60 years, Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett has been putting on a show for Wall Street. Since becoming CEO in 1965, the benchmark S&P 500 has increased by more than 35,000%, inclusive of dividends paid. By comparison, the affably dubbed “Oracle of Omaha” has overseen aggregate gains in his company’s Class A shares (BRK.A) of well over 4,900,000%!
When you crush Wall Street’s broadest-based stock index this decisively, you’re going to draw a lot of attention. This is why investors wait on pins and needles once each quarter for Berkshire Hathaway to file its Form 13F with the Securities and Exchange Commission. A 13F shows investors precisely what stocks Buffett and his top investment aides, Todd Combs and Ted Weschler, have been buying and selling.
Although Berkshire’s 13Fs have been a veritable gold mine for decades, they fail to tell the complete story about Warren Buffett’s favorite stock to buy — a company whose shares have been purchased for 23 consecutive quarters, dating back to July 2018.
Warren Buffett has a newfound fascination with energy stocks
One of the more interesting aspects of Berkshire’s 44-stock, $387 billion investment portfolio is that it’s highly concentrated. This is to say that Buffett and his team strongly believe in putting more of their company’s capital to work in their best investment ideas. As of June 14, roughly 63% of invested assets were tied up in only three stocks.
For decades, financial stocks (Buffett’s favorite sector to invest in) and consumer staples comprised a meaningful percentage of invested assets. But recently, we’ve witnessed Berkshire’s brightest minds gravitating to energy stocks.
Oil and gas stocks have mostly been an afterthought for the Oracle of Omaha since this century began. Yet as last week, Chevron (CVX) and Occidental Petroleum (OXY) combined to account for nearly $34 billion in market value. In fact, the 252.3 million shares Berkshire owns of Occidental have been built up from scratch since the first quarter of 2022.
Buffett, Combs, and Weschler wouldn’t have this amount of capital tied up in Chevron and Occidental Petroleum if they didn’t strongly believe the spot price of crude oil would remain elevated, relative to its historic average. Macro factors certainly support the thesis that the price of oil can remain high.
For three years during the COVID-19 pandemic, major oil and gas companies were forced to reduce their capital expenditures (capex) due to historic demand uncertainty. Even with capex normalizing in the wake of the pandemic, increasing crude oil supply to meet growing global demand has proved challenging. Drilling tends to be the most-profitable and highest-margin segment for integrated energy companies. As long as crude oil supply remains tight, the price of oil is liable to be elevated.
Being “integrated” energy operators has its perks, too. In addition to their respective drilling segments, Chevron oversees transmission pipelines and refineries, with both companies also operating chemical plants. These midstream and downstream operations provide predictable cash flow and help to hedge against any potential downside in the spot price of crude oil.
Big oil is known for its generous capital-return programs, as well. Chevron’s board OK’d a $75 billion share repurchase program in January 2023 and has increased its base annual dividend for 37 consecutive years. Although Occidental Petroleum is working its way out of a sizable debt hole since it acquired Anadarko, the company has been incrementally increasing its quarterly dividend over the last two years.
Meet the stock Warren Buffett has purchased for 23 consecutive quarters
Berkshire Hathaway’s quarterly 13Fs make it crystal clear that Buffett and his crew are big fans of the oil and gas industry at the moment. But not a single stock listed in the company’s 13Fs has been purchased by the Oracle of Omaha for anywhere close to 23 consecutive quarters.
To locate Buffett’s favorite stock to buy, you’ll need to look beyond 13Fs and dig into his company’s quarterly operating results. On the final page of these results, just before the executive certifications, you’ll find detailed share repurchasing activity for the quarter. Plot twist time… Warren Buffett’s favorite stock to buy is shares of his own company, Berkshire Hathaway!
Before July 2018, a rigid line in the sand existed that dictated when share buybacks could be undertaken. In order for Buffett to green-light share repurchases, Berkshire’s stock had to be valued at or below 120% of book value (i.e., no more than 20% above book value, as of the most recent quarter). At no point for many years leading up to July 2018 had Berkshire’s stock dipped to or below this threshold. As a result, not a single share was repurchased.
On July 17, 2018, Berkshire’s board reworked the criteria governing share buybacks to ensure that Warren Buffett and his recently passed right-hand man, Charlie Munger, could get off the sidelines and get into the proverbial game.
Under the new criteria, buybacks could be made with no ceiling or end date as long as:
- Berkshire Hathaway has at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet (the company ended March 2024 with $189 billion in cash); and
- Warren Buffett believes shares are intrinsically cheap.
Since these new criteria were passed in mid-July 2018, Warren Buffett has purchased more than $77 billion worth of his company’s shares over a span of 23 consecutive quarters.
Since Warren Buffett’s company doesn’t pay a dividend, share buybacks are the clearest way to reward Berkshire Hathaway’s shareholders. A steady stream of share repurchases is incrementally increasing the ownership stakes of the company’s investors. In short, it’s encouraging the long-term thinking that Buffett prefers from Berkshire’s shareholders.
Additionally, companies with steady or growing net income, such as Berkshire Hathaway, can benefit from a declining outstanding share count. With fewer shares to divide net income into, earnings per share (EPS) tends to rise over time. This EPS boost can make Berkshire’s stock even more attractive to fundamentally focused investors.
— Sean Williams
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Source: The Motley Fool