If you’ve ever wondered why the Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) annual meeting of shareholders is creating such a buzz, take a closer look at the company’s performance since Warren Buffett took the reins.
According to the company’s 2020 shareholder letter, Berkshire Hathaway has averaged a compound annual return of 20% since 1965. Between 1964 and 2020, Buffett’s company nearly outperformed the benchmark S&P500 of 2,800,000%. I’d say that’s a pretty good reason to be careful when Warren Buffett and his right-hand man Charlie Munger are talking.
If you need more proof of Buffett’s success, take a closer look at Berkshire Hathaway’s investment portfolio. The $108.6 billion the Oracle of Omaha and his team invested over the years and decades is now worth $304.7 billion.
Most intriguing of all, $157.8 billion (80%) of that $196.1 billion in unrealized gains came from just four stocks.
Apple: $88.2 billion in unrealized gains
Nearly 45% of Berkshire Hathaway’s unrealized gains come from the tech kingpin Apple (NASDAQ:AAPL), which Buffett affably referred to as his company’s “third business.” The $31.1 billion cost base for more than 907 million Apple shares turned into a market value of $119.3 billion last weekend.
Apple has become a dual-threat juggernaut. It’s long been a product company, but under CEO Tim Cook, it’s focus on the platforms of the future. In its most recent quarter, service revenue grew again by a double-digit percentage. In the first six months of the current fiscal year, more than 15% of sales come from high-margin services.
Then again, it’s not like Apple has given up on its core products. Since the unveiling of its first 5G-enabled iPhones, sales of the devices have exploded. In six months, the company made $113.5 billion from iPhone sales alone. All other categories – Macs, iPads and portable devices – also grew by double digit percentages year over year.
Beyond his incredible innovation and execution, Buffett is also a big fan of Apple’s return of capital program. The company recently announced a $90 billion share buyback and is paying one of the largest nominal dividends of any public company. There is simply no reason for Buffett to sell his stake.
Bank of America: $27.3 billion in unrealized gains
It’s no secret that banking stocks are Warren Buffett’s favorite place to park his company money. Standing alone ahead of the pack among banking stocks is Bank of America (NYSE: BAC). With a base cost of $14.6 billion and a market value of $41.9 billion, last weekend Buffett and his team were up $27.3 billion from their position.
The reason the Oracle of Omaha likes banks so much is that they are lucrative in the long run. Although recessions are an inevitable part of the business cycle, periods of contraction in the US economy are generally short-lived. In comparison, economic expansions often last for years. Banking stocks like BofA bide their time during recessions, then benefit from growth from multiple revenue channels (retail and commercial banking, and wealth management/investment) when the economy is firing on all cylinders.
One of the biggest catalysts for Bank of America will be its sensitivity to interest rates. When the yield curve steepens and the Federal Reserve eventually tightens its stance on lending to keep the US economy from overheating, BofA will be the main beneficiary of higher rates. In short, its interest income should skyrocket.
Additionally, Bank of America has done a fantastic job investing in digital banking initiatives and consolidating some of its branches to reduce non-interest expenses. As we move towards a more digital banking experience, BofA is ready to capitalize on the potential for higher margins.
American Express: $22 billion in unrealized gains
financial services company American Express (NYSE:AXP) is one of Buffett’s oldest holdings. Since purchasing AmEx in 1993, Oracle’s investment in Omaha has grown from a base cost of $1.3 billion to $23.3 billion.
Similar to Bank of America and other banking stocks, American Express is a cyclical business. It struggles a bit when recessions hit, but basks in multi-year economic expansions. Investors who have the patience to hang on for long periods are often handsomely rewarded. In Buffett’s case, the dividend American Express pays out each year equates to a 20% return on Berkshire Hathaway’s cost base.
In addition to being cyclical, AmEx has two more tricks up his sleeve that contribute to its success. First of all, it’s what I like to call a double dipper. In addition to collecting processing fees from merchants, American Express is also a lender through personal and business credit cards. This allows it to generate interest and fee income during these multi-year bull markets.
Second, AmEx has a knack for targeting affluent customers with its credit accounts. The well-to-do are less likely to change their spending habits during minor economic disruptions. This implies a lower probability of credit defaults, compared to the average consumer, and more predictable income.
Coca-Cola: $20.3 billion in unrealized gains
Rounding out the quartet, beverage giant Coca Cola (NYSE:KO). Berkshire Hathaway’s oldest stake, at 33, was bought for a total of $1.3 billion and has a market value of $21.6 billion, last weekend. Not a shabby comeback.
If you thought AmEx’s 20% cost efficiencies were impressive, wait until you get a closer look at Coca-Cola. The company’s annual base payout of $1.68 equates to a 52% return on cost compared to the adjusted $3.25 per share that Buffett paid for each Coke share in 1988. Suffice it to say say that Buffett has no incentive to sell when his business the initial investment doubles every two years dividend income alone.
What has made Coca-Cola such a fantastic company is its geographical diversity and its proximity marketing. In terms of reach, Coke products are sold in every country in the world except two (North Korea and Cuba). It is able to take advantage of the demand and predictable cash flows of developed markets, as well as the stronger organic growth potential of emerging markets. In total, Coke has more than 20 brands generating at least $1 billion in sales each year.
As for marketing, no brand of consumer goods is more recognized in the world than Coke. The company has vacation ties to the United States, partners with a handful of well-known brand ambassadors, and has been more than willing to take to social media to reach potential product buyers. It’s one of those brands that can easily cross generational gaps to engage consumers.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.