For nearly six decades, Berkshire Hathaway (BRK.A -1.05%) (BRK.B -1.36%) CEO Warren Buffett has been a wealth-building machine for his company’s shareholders. Since ascending to the lead role, the Oracle of Omaha has led his company’s Class A shares (BRK.A) to an aggregate return of 3,787,464%, which outpaces the total return of the S&P 500, including dividends paid, by a factor of 153.
Even though Warren Buffett isn’t infallible, his track record coerces both new and tenured investors to follow his every move.
Occidental Petroleum has been a popular Buffett buy of late
With Berkshire Hathaway sitting on more than $128 billion in cash, cash equivalents, and Treasury bonds, as of the end of 2022, Buffett and his team have plenty of firepower to do some shopping during the current bear market.
Since the beginning of 2022, oil stock Occidental Petroleum (OXY -2.59%) has been one of Berkshire Hathaway’s most-popular buys. Based on a Securities and Exchange Commission filing from March 15, 2023, Buffett and his team have purchased more than 208 million shares of Occidental Petroleum.
Betting big on Occidental (and Chevron (CVX -2.03%), too) looks to be a clear indication that Berkshire Hathaway’s investment team, which includes “lieutenants” Todd Combs and Ted Weschler, expects energy commodity prices to remain historically high. While Russia’s invasion of Ukraine certainly throws a monkey wrench into Europe’s energy supply needs, it’s the three years of reduced capital investment due to pandemic-related uncertainty that’s done more damage to the energy supply chain. With no easy way to increase oil production, the expectation is for supply uncertainty to provide a lift to the spot price of crude oil.
To build on this point, Occidental Petroleum generates a higher percentage of its net sales from drilling than Chevron, which is Berkshire Hathaway’s third-largest holding by market value. If the thesis of higher energy commodity prices is correct, owning shares of Occidental would allow Berkshire to somewhat lever its bet.
Another reason the Oracle of Omaha and his team have likely been buyers is because of a sizable warrant stake in Occidental. In 2019, Berkshire Hathaway handed over $10 billion to Occidental to facilitate its acquisition of Anadarko. In return, Buffett’s company received $10 billion in Occidental preferred stock that yields 8% annually, as well as 83.9 million warrants that can be exercised at $59.62 per share. It’s in Berkshire Hathaway’s best interests if Occidental Petroleum’s stock remains at or above this exercise price.
The one stock Warren Buffett is virtually guaranteed to keep buying (and it’s not Occidental)
However, Occidental Petroleum isn’t the stock Warren Buffett and his investment team are likeliest to keep buying if stock market volatility and uncertainty persist. While I wouldn’t rule out Berkshire Hathaway further building its 23.1% stake in Occidental, there’s another company that’s all but guaranteed to be on Buffett’s buy list every single quarter until a new bull market emerges. It’s also a company you’re not going to find while perusing a Berkshire Hathaway quarterly 13F filing. I’m talking about none other than (drum roll) … Berkshire Hathaway.
Prior to mid-July 2018, the only way share buybacks could be undertaken was if Berkshire Hathaway’s share price fell to or below 120% of book value (i.e., no more than 20% above book value). At no point in the half-decade leading up to mid-July 2018 did this happen, which resulted in no buyback opportunities for the Oracle of Omaha or his team.
In mid-July 2018, Berkshire’s board of directors amended the clauses governing share repurchases to allow Buffett and his right-hand man, executive vice chairman Charlie Munger, more freedom to pull the trigger on buybacks. The two new criteria were as follows:
- As long as Berkshire Hathaway has at least $30 billion in combined cash, cash equivalents, and U.S. Treasuries on its balance sheet; and
- Warren Buffett and Charlie Munger agree that shares are trading below their intrinsic value, buybacks can be made without a ceiling.
Between mid-July 2018 and Dec. 31, 2022, Buffett and Munger have repurchased more than $66 billion worth of their own company’s stock, with buybacks occurring every single quarter.
Share repurchases offer a number of benefits for Berkshire Hathaway and the company’s shareholders. The most obvious is that a falling outstanding share count can boost earnings per share over time for companies with steady or growing net income. Berkshire’s ongoing buyback program should make the company even more fundamentally attractive to investors.
Another positive for shareholders is that their ownership stake in Berkshire Hathaway is increasing with each passing quarter. Just as Apple‘s historic share buybacks have increased Berkshire’s stake in the company without Buffett or his investing lieutenants having to lift a finger, regular share repurchases by Berkshire Hathaway will help existing shareholders own more of the company over time.
Lastly, buying back over $66 billion of Berkshire Hathaway stock is a crystal-clear indicator from Warren Buffett that he believes his company’s stock and operating performance will continue to improve over the long run. Since most of the stocks in Berkshire Hathaway’s $322 billion investment portfolio are cyclical, the company is poised to take advantage of long periods of economic expansion.