A unique ability to buy winning stocks has made Warren Buffett the sixth richest person on the planet. His past success and popular wisdom have made him a household name and one of the most watched investors in the world. Luckily, following in your track of title picking doesn’t require you to have your phone number speed dialed. Buffett’s investment company, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) files its holdings with the Securities and Exchange Commission quarterly and its latest report – released this week – reveals that 76% of Berkshire Hathaway’s $ 293 billion (yes, billion) portfolio is invested in just five stocks across three sectors.
Buffett’s greatest position
Warren Buffett’s largest position – valued at $ 121.5 billion – is Apple (NASDAQ: AAPL).
The consumer electronics juggernaut is best known for its cutting-edge computers, smartphones and tablets, but it is increasingly taking advantage of its service segment. Although consumer electronics still make up the lion’s share of Apple’s sales, product revenues are heavily dependent on new device launches and holiday shopping trends, making consumer electronics revenues “spotty” all over the place. throughout the year. Devices are also a relatively low margin business.
However, Apple’s service business, which includes the App Store, provides it with high-margin recurring revenue, very favorable to earnings and dividends. In the last quarter, services accounted for 21.5% of Apple’s total revenue, up from 16% in the same quarter of 2017. The company’s last 12-month net profit fell to less than $ 50 billion to $ 87 billion and its dividend payout rose to $ 0.88 per share from $ 0.63 per share over that period.
So far, Berkshire Hathaway’s unrealized profit on its Apple shares stands at nearly $ 90 billion, so it’s a big winner for Buffett. It’s important to note that there isn’t much to suggest that it will degrade on Apple. Apple has more than $ 194 billion in cash and marketable securities on its balance sheet and although it is already one of the largest companies in the world, it still recorded 36% revenue growth in year over year in the quarter ending June 30, suggesting its products and services continue to appeal to consumers.
Bet on banks
Buffett has a penchant for easy-to-understand companies, so it’s no surprise that two of his top five positions are Bank of America (NYSE: BAC) and American Express (NYSE: AXP), two financial institutions with a relatively simple economic model: pocketing interest on loans. It owns $ 41.6 billion in Bank of America shares and $ 25 billion in American Express shares as of June exit, making it its second and third positions, respectively.
Bank of America is the second largest bank in the United States and the eighth largest bank in the world. It makes money in other ways, including its capital markets and wealth management solutions, but most of its profits come from charging interest on loans, including mortgages and cards. credit, and fees associated with traditional bank accounts. Likewise, American Express makes money by charging transaction fees to merchants that accept American Express credit cards, but its main source of revenue is the interest associated with small business borrowing and card use. credit.
Traditionally, banks like Bank of America and American Express are more profitable when the gap between their cost of borrowing and the interest rates charged to customers is large. A low interest rate environment has made it harder to maximize this spread, known as the net interest margin, but Bank of America and American Express are still producing profits for shareholders.
In 2020, Bank of America earned $ 1.87 per share and American Express earned $ 3.77 per share despite headwinds associated with a dramatic slowdown in economic activity caused by COVID-19 closures. In 2021, analysts estimate that corporate profits will reach $ 3.26 per share and $ 8.81 per share, respectively, due to the rebound in GDP. If so, it should give management even more leeway to increase dividend payouts, giving Buffett an additional incentive to hold onto his shares.
These companies are tasty
Sticking to his straightforward investing approach, two consumer staples companies round out Warren Buffett’s five biggest holdings: Coca Cola (NYSE: KO) and Kraft Heinz (NASDAQ: KHC)
Coca-Cola and Kraft Heinz are among the most recognizable brands in the world. Coca-Cola owes its recognition to its eponymous soft drink, but it has expanded its product line in recent years to take advantage of changing trends in consumer tastes. For example, he isolated himself against the abandonment of sugary drinks by consumers by becoming one of the biggest players in bottled and sparkling water. He even launched a hard seltzer under his popular Topo Chico brand in 2020. Berkshire Hathaway has owned Coca-Cola shares since 1988 and currently owns 400 million shares, making it Coca-Cola’s largest shareholder.
Kraft Heinz was formed by the marriage of Kraft and Heinz in 2015. The combination created a food giant, but its performance was probably more bumpy than Buffett had hoped. The high price paid to merge the companies resulted in goodwill impairment and a reduction in dividend in 2019, and its $ 37 share price is down from a high above $ 90 in 2017 .
Nonetheless, Buffett seems determined to stick around for a long time on his 325.6 million shares. Despite the cut in its dividend, Kraft Heinz is still providing Berkshire Hathaway with a relatively handsome 4.3% return, and that’s far better than what the Oracle of Omaha can get in US Treasuries.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.