While there are a number of prominent money managers on Wall Street, none are as closely watched by the investment community Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett.
One of the reasons why investors are attracted to the Oracle of Omaha is his track record. While not infallible, Buffett has delivered a total return of nearly 5,500,000% on his company’s Class A (BRK.A) shares since becoming CEO in the mid-1960s. Based on annualized total returns, including dividends, Berkshire Hathaway has nearly doubled the benchmark’s return S&P500 spanning six decades.
The other appeal for investors is Buffett’s willingness to be an open book. Whether it’s through his annual letter to shareholders or at Berkshire’s annual meetings, Buffett often shares the characteristics he looks for in “great companies,” as well as his views on the U.S. economy.
But what Warren Buffett is perhaps best known for is his penchant for value investing. There is little that puts a smile on his face more than the opportunity to put his company’s capital to work in a proven company with a sustainable moat at an affordable price.
While there are plenty of examples throughout history of the Oracle of Omaha snapping up some amazing value stocks, there’s one stock he continues to buy regardless of valuation.
Warren Buffett has a knack for finding great deals hidden in plain sight
Despite selling more than 500 million shares of Apple (NASDAQ: AAPL) between October 1, 2023 and June 30, 2024, Berkshire Hathaway’s top position represents the perfect example of Warren Buffett finding a great company at a very favorable price.
When Buffett started building his company’s stake in Apple in the first quarter of 2016, the tech giant’s price-to-earnings ratio (TTM) ranged from 10 to 12, which was well below that of the US tech giant. the S&P 500. With the exception of the dot-com bubble, Apple stock has never been cheaper.
While the iPhone has remained dominant, in terms of domestic smartphone market share, Apple’s growth has been led by its Services division. This is a subscription-driven segment designed to keep users loyal to the ecosystem of products and services. It should also improve the company’s operating margin in the long term, and reduce the revenue peaks and valleys that come with iPhone upgrade cycles.
These days, Apple is hardly a bargain. As of the closing bell on October 8, Apple shares were valued at a multiple of more than 34 times TTM earnings per share (EPS). Although Buffett hinted at Berkshire’s annual shareholder meeting in May that the reduction of his company’s stake in Apple was done for tax purposes, it’s entirely possible that valuation also played a role.
Berkshire Hathaway’s number 3 holding company, Bank of America (NYSE: BAC)serves as another example of Warren Buffett jumping on a proven company that was historically cheap.
After the financial crisis, Buffett invested $5 billion in BofA to strengthen its balance sheet and received preferred stock and warrants in return. When this investment was announced in August 2011, Bank of America was trading at less than 38% of its book value. A sort of unwritten rule on Wall Street is to buy high-quality bank stocks at or below their book value and sell them at or near twice book value.
In the years since the financial crisis, Bank of America has been able to put its legal issues firmly in the rearview mirror. Moreover, it has benefited enormously from being the most interest-rate-sensitive U.S. money center bank. The Federal Reserve’s 525 basis point increase in the Federal Funds Rate between March 2022 and July 2023 added billions of dollars in net interest income to BofA’s operating income.
But with Bank of America shares trading at a 16% premium to their book value, it’s perhaps no surprise that Buffett has sold off more than $10 billion of BofA stock since mid-July.
The Oracle of Omaha is steadfast in his desire to get a good deal – with one exception.
This is the one stock that Buffett continues to buy, regardless of its valuation
Despite spending a small fortune buying Berkshire Hathaway’s shares in Apple, Bank of America, ChevronAnd Western petroleumThere’s one stock that dwarfs them all, in terms of the amount of money Warren Buffett has invested.
However, investors won’t find this company in Berkshire’s quarterly filed Form 13Fs. This is the document that gives investors a quick snapshot of what Wall Street’s smartest money managers have been buying and selling.
Instead, investors will have to delve into Berkshire Hathaway’s quarterly results to find evidence that Buffett has been buying his favorite stocks. Towards the end of each quarterly filing, just before board certifications, you’ll find the page that summarizes Berkshire Hathaway’s stock buyback activity – because the stocks that Buffett continues to buy, regardless of valuation, are shares of his own company.
Berkshire Hathaway’s share repurchase program has evolved quite a bit since mid-2018. Before July 2018, buybacks were only allowed if Berkshire Hathaway shares fell to or below 120% of book value. Because Berkshire’s stock never fell below this line-in-the-sand threshold, Buffett was never able to spend a dime on buybacks.
On July 17, 2018, Berkshire Hathaway’s board changed its buyback rules to give Warren Buffett and then right-hand man Charlie Munger (who passed away in November 2023) more freedom to execute buybacks. These simplified new rules allowed share buybacks indefinitely without an end date, as long as:
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Berkshire Hathaway has at least $30 billion in cash, cash equivalents and U.S. Treasuries on its balance sheet; And
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Warren Buffett views his company’s stock as inherently cheap.
There is a lot of wiggle room on this second point, allowing Buffett to regularly buy back his company’s shares. Since July 2018, Buffett has spent nearly $78 billion buying back Berkshire Hathaway stock, including $345 million during the quarter ended in June.
In addition, buybacks have occurred in all 24 quarters (through June 30, 2024) since these new buyback rules came into effect. You’d have to go back to 2008 to find the last time Berkshire Hathaway stock was as expensive as it is today, relative to book value… and yet Buffett keeps buying!
Because Berkshire Hathaway doesn’t pay dividends, conducting buybacks is the easiest way for Buffett to reward his company’s shareholders and encourage long-term thinking. By steadily reducing the number of outstanding shares of the company, the ownership stake of long-term investors is gradually increased.
In addition, companies with stable or growing net income, such as Berkshire, often benefit from an increase in earnings per share while having fewer shares outstanding. This can make their shares more attractive to investors.
With Berkshire Hathaway sitting on a record $276.9 billion in cash, cash equivalents and U.S. Treasuries at the end of June, the Oracle of Omaha has every incentive to keep buying back his company’s stock regardless of valuation.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions at Bank of America. The Motley Fool holds positions in and recommends Apple, Bank of America, Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
This Is the One Stock Warren Buffett Continues to Buy Regardless of Valuation Originally published by The Motley Fool
