Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett is one of Wall Street’s most-followed investors, and it has everything to do with his stunning outperformance of the benchmark S&P 500.
Since becoming CEO nearly six decades ago, the Oracle of Omaha has overseen a cumulative gain of more than 5,500,000% in his company’s Class A shares (BRK.A). Comparatively, the S&P 500 has delivered a very respectable, but Buffett-trailing, total return, including dividends, of less than 38,000% over the same stretch.
Even though Buffett is fallible — he took quite the bath on his company’s stake in legacy media stock Paramount Global — investors often wait on the edge of their seat for Berkshire Hathaway’s Form 13F filings. These are required filings for institutional investors with at least $100 million in assets under management that provide a snapshot of which stocks were purchased and sold in the latest quarter.
The funny thing about 13Fs is they don’t always tell the full story — especially when it comes to Warren Buffett and Berkshire Hathaway.
Warren Buffett has spent roughly $78 billion buying his favorite stock since mid-2018
Although 13Fs have shown Buffett to be a decisive net-seller of stocks in each of the last seven quarters to the aggregate tune of almost $132 billion, there have been selective stocks that have piqued the interest of Berkshire’s chief.
For instance, Buffett has overseen the purchase of more than 255 million shares of integrated oil and gas giant Occidental Petroleum since the start of 2022.
But when it comes to the cumulative amount of Berkshire’s cash Buffett has put to work, nothing tops his favorite stock over the last six years… Berkshire Hathaway. Share repurchases are found in Berkshire’s quarterly operating results but aren’t listed in the company’s 13Fs.
Share buybacks haven’t always been a given for Buffett or his late right-hand man Charlie Munger, who passed away at age 99 in November. Prior to July 2018, share repurchases were only allowed if Berkshire’s share price fell to or below 120% of book value, as of the most recent quarter. This is a line-in-the-sand threshold that Berkshire Hathaway’s stock never dipped below, which meant Buffett and Munger weren’t allowed to spend a cent on buybacks.
On July 17, 2018, Berkshire’s board amended the rules governing buybacks to allow its most important players to get off the bench. The new rules set no ceiling or end date to share repurchases as long as:
- Berkshire Hathaway has at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet; and
- Warren Buffett believes his company’s share are intrinsically cheap.
With the second criterion up for interpretation, this policy change gave Buffett free reign to (finally) undertake a share repurchase program. He’s purchased shares of Berkshire Hathaway for 24 consecutive quarters, including $345 million in the June-ended quarter, and put close to $78 billion to work in the company nearest and dearest to his heart over the last six years.
Buybacks are an easy way for Buffett to incent a long-term mindset from his company’s shareholders, as well as improve Berkshire’s earnings per share (EPS) over the long run as its outstanding share count decreases.
While Berkshire Hathaway is, without question, Warren Buffett’s favorite stock, there’s actually another company he’s spent more of Berkshire’s cash purchasing shares of over the last year.
Move over Berkshire Hathaway — this is Buffett’s top buy over the last year
Over the previous four quarters, Buffett has green-lit the repurchase of a little over $6.1 billion worth of his company’s stock. But since the midpoint of 2023, average cost basis estimates from 13F aggregator WhaleWisdom.com imply the Oracle of Omaha has spent around $6.5 billion buying shares of property and casualty insurer Chubb (CB).
For those of you who closely monitor Berkshire’s 13F filings, Chubb wasn’t always listed as a holding. Between July 2023 and May 2024, Buffett asked for and was granted “confidential treatment” for one of his positions by regulators. This confidential stock was revealed to be Chubb in mid-May 2024.
The “confidential treatment” tool is something Buffett occasionally relies on when he wants to build up a stake in a company without revealing his cards to everyday investors. Since investors have a tendency to pile into the stocks he and his investment lieutenants (Todd Combs and Ted Weschler) are buying, keeping Berkshire’s purchase activity in a larger holding “confidential” allows him to, in theory, build a stake without much of a share price premium.
So, what’s compelled the Oracle of Omaha to spend more of his company’s capital on Chubb than his favorite stock over the last year?
To start with, the insurance industry tends to be boring, highly predictable, and very profitable. Even though catastrophe losses are an eventual given for all insurers, they possess exceptional premium pricing power in pretty much all climates. Loss events offer a reason to raise premiums, while the inevitability of future loss events allow insurers to increase premiums even during periods of below-average payouts.
Insurers like Chubb are also benefiting from a period of above-average interest rates. Insurers invest their float (the premium they collect that isn’t paid out in claims) in extremely safe, short-term, interest-bearing assets. Despite the Federal Reserve kicking off a rate-easing cycle last week, insurers are generating more on their float than they have in a long time.
Furthermore, Chubb’s homeowner insurance segment predominantly caters to high-value homes. Just as longtime Berkshire holding American Express thrives by catering to high earners, Chubb has found a very profitable niche by targeting high-end home and content insurance. High earners are usually less susceptible to minor downturns and inflationary pressures, when compared to average earners.
Whether Chubb is still a good value remains to be seen. As of the closing bell on Sept. 20, shares of the company were trading at a 92% premium to book value, which is a level not consistently observed in more than two decades. Even though Chubb is a steady grower and caters to higher-end clients, a 92% premium to book value is a tough pill to swallow.
In other words, don’t be surprised if Buffett’s stake in Chubb has reached its peak.
— Sean Williams
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Source: The Motley Fool