For almost 60 years, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has astonished Wall Street with his investing prowess. Since becoming CEO in 1965, the mildly dubbed “Oracle of Omaha” has overseen a total return of nearly 4,950,000% on his company’s Class A shares (BRK.A). Which explains why some 40,000 investors flock to Berkshire’s annual shareholders meeting each year.
Many books have been written about Buffett’s “recipe” for success. While you can read more about his core investment philosophy in more detail, the Oracle of Omaha typically focuses on proven, brand-name companies with solid management teams and well-defined competitive advantages.
Currently, Berkshire’s $386 billion investment portfolio consists of 44 stocks and two exchange-traded funds. But make no mistake: These nearly four dozen securities are not created equal.
In Warren Buffett’s most recent annual letter to shareholders, he listed eight existing positions that he and his team plan to hold “indefinitely.” Coincidentally, one of these permanent holdings quietly became the last company on Wall Street to split stock.
Warren Buffett’s Eight ‘Eternal’ Investments
With a few exceptions (Activision Blizzard in 2023, for example), the Oracle of Omaha is deploying Berkshire Hathaway’s capital with the idea that he’ll be investing in great companies for years, if not decades. But for eight of the company’s 44 stocks, there simply isn’t an exit strategy.
It probably comes as no surprise that Coca Cola (NYSE: KO) And American Express (NYSE: AXP) are two of the perpetual holdings Buffett noted in his letter to shareholders — the reason being that Coca-Cola and AmEx have been continuous holdings since 1988 and 1991, respectively. Thanks to Berkshire’s exceptionally low cost bases in both businesses, Buffett oversees annual cost-plus returns of 60% and 33% for Coca-Cola and American Express, respectively.
The third company Buffett identified as an unspecified holding company in his annual letter to shareholders is the oil and gas company Occidental petroleum (NYSE: OXY). Since the beginning of 2022, Berkshire’s brightest minds have acquired more than 255 million shares of Occidental common stock, representing a nearly 29% stake in the company. Berkshire also owns more than 83.8 million warrants for Occidental common stock with an exercise price of $59.624 per share.
While Occidental’s debt load isn’t exactly a typical Buffett investment, the company’s drilling segment is ideally positioned to benefit from tight global oil supplies and expected growth in fossil fuel demand over the next decade.
Perhaps the biggest surprise is that Berkshire Hathaway’s remaining perpetual assets are the five Japanese trading houses in which Buffett and his top advisors, Todd Combs and Ted Weschler, have invested. I’m talking about Mitsubishi (OTC: MSBHF), Itochu (OTC: ITOCY) (OTC: ITOCF), Mitsui (OTC: MITSF)(OTC: MITSY), Marubeni (OTC: MARUY)(OTC: MARUF)And Sumitomo (OTC: SSUM.Y)(OTC: SSUM.F).
All five of these Japanese trading houses have their proverbial hands in multiple cookie jars at once. They regularly have oil and gas operations and manufacturing segments, and are typically involved in food production, among many other industries and sectors. In short, Mitsubishi, Itochu, Mitsui, Marubeni, and Sumitomo are vital to the long-term success of the Japanese economy.
Meet Wall Street’s Latest Stock Split (and a Buffett Stock Forever)
Earlier this week, probably without 99.9% of investors realizing it, one of those eight unspecified holdings in Berkshire’s $386 billion portfolio became the latest stock on Wall Street to be split.
A stock split is an event that allows a publicly traded company to adjust its stock price and number of outstanding shares without affecting its market capitalization or operating performance. These adjustments come in two forms: forward and reverse.
With a forward stock split, a company attempts to lower its stock price to make it nominally more affordable to ordinary investors. A reverse stock split, on the other hand, is designed to increase a company’s stock price, often with the goal of ensuring that it meets the continued listing standards of a major stock exchange.
Historically, companies that have implemented a forward stock split since 1980 have significantly outperformed those that have not S&P 500 in the 12 months following their initial stock split announcement (25.4% vs. 11.9%). This data point from bank of america Global Research explains why investors prefer companies that perform a forward split.
On May 1, the board of directors of Japanese trading house Mitsui announced a 2-for-1 forward split with a record date of June 30. Because June 30 fell on a weekend, Monday, July 1 became the effective date for Mitsui’s stock split. The purpose of this split, according to Mitsui’s board of directors, was to “make investing more accessible to our shareholders, and to create more liquidity in our shares and further expand our investor base.”
In addition, Mitsui’s announcement was accompanied by plans to buy back up to 40 million shares of its common stock between May 2 and September 20, totaling $1.3 billion. This represents a whopping 2.64% of the company’s outstanding shares. For companies with stable or growing net income, share buybacks are a way to boost earnings per share (EPS) and make great companies appear more fundamentally attractive.
In addition to stellar capital return programs, Buffett appreciates the modest compensation for executives at all five Japanese trading houses. While CEO salaries at certain U.S. companies can be eye-popping and mind-boggling, the management teams at Mitsui, Mitsubishi, Itochu, Marubeni and Sumitomo aren’t breaking the bank or lining their pockets.
Best of all, Mitsui and its ilk remain relatively cheap compared with an expensive U.S. market that has forced Buffett to be a net seller of stocks for six consecutive quarters. While the S&P 500’s Shiller price-to-earnings (P/E) ratio is among the highest in history during a bull market, a leading conglomerate like Mitsui has been valued at a P/E ratio below 10 for nearly the entire trailing three-year period when backtested to 1871.
Warren Buffett and his team love proven value stocks with solid capital return programs, and that’s exactly what they get with Wall Street’s latest stock split and Buffett’s permanent investment Mitsui.
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Bank of America and American Express are advertising partners of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
One of Warren Buffett’s 8 “Forever” Holdings Just Became Wall Street’s Latest Stock Split. Stock was originally published by The Motley Fool
