Warren Buffett is an investing icon on Wall Street. Since taking the helm of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) in the mid-1960s, he’s led his company’s stock to an annualized return of 20%. That nearly doubles up the total annual return, including dividends, for the S&P 500 of 10.2% since 1965. In aggregate, Buffett’s company has outperformed the widely followed S&P 500 by almost 2,800,000% in 56 years.
What’s interesting about Buffett’s investing strategy is that he’s keeping things simple. He’s focusing his research on a handful of sectors, buying companies that he believes offer sustainable competitive advantages, and, most importantly, hanging onto those businesses for long periods of time and allowing compounding to work its magic. Approximately a fifth of the Oracle of Omaha’s portfolio has been held for 15 or more years.
However, a trio of Buffett holdings really stand out for their tenure. After reviewing U.S. Census Bureau population estimates for December 2020, 112.3 million Americans weren’t even alive the last time Berkshire Hathaway didn’t own these three stocks.
If you want to talk about the power of compounding and conviction, look no further than Warren Buffett’s holding in beverage giant Coca-Cola (NYSE:KO). Berkshire Hathaway has been a faithful holder of Coca-Cola stock since 1988.
Aside from an insanely low cost basis, one of the reasons Buffett sticks with Coca-Cola is the company’s geographic reach. With the exception of North Korea and Cuba, Coke’s products can be found in every other country around the world. This means the company benefits from the steady cash flow and its 20% share of cold beverages in developed markets, as well as its 10% share and the juicier growth prospects of emerging market countries. All told, Coke has more than 20 beverage brands generating at least $1 billion in annual sales.
Coca-Cola’s success can be attributed to its excellent marketing campaigns, too. The company has clear holiday tie-ins, can reach consumers via point-of-sale advertising, is pushing into digital ads, and has an army of well-known ambassadors. Coke is possibly the most well-recognize consumer goods brand in existence today.
For Berkshire Hathaway, it’s also a big-time moneymaker. With a cost basis of about $3.25 a share and an annual dividend payout of $1.68, Warren Buffett’s yield on cost for Coca-Cola is 52%! No joke: Buffett doubles his initial investment every two years from the dividend alone.
Another holding that’s been in Berkshire Hathaway’s portfolio longer than 112 million Americans have been alive is money-center bank Wells Fargo (NYSE:WFC). Even though the Oracle of Omaha and his team have dramatically reduced their company’s stake in Wells Fargo, it’s been a continuous holding since 1989.
There’s no sector that Buffett thinks more highly of than financials, and no industry that’s sought after more than banking. In an expansionary economy, bank stocks are money machines. They’re generally growing their loan and deposit portfolio, and in a growing economy can often return a healthy portion of capital to shareholders via dividends and buybacks.
Wells Fargo’s niche has always been its ability to attract affluent clientele. Wealthier clients are more likely to take advantage of multiple Wells Fargo services, and they’re less likely to lapse on their loan obligations or shift their spending habits during minor economic disruptions. They’ve long been the company’s bread-and-butter growth driver.
But as noted, Buffett and his team have reduced their stake in Wells Fargo by 427 million shares, or about 89%, over the past four years. This probably has to do with the company admitting that 3.5 million unauthorized accounts were opened between 2009 and 2016 as part of an aggressive cross-selling push at the branch level. Buffett is a big believer in earning and holding the trust of consumers and shareholders. With that trust broken following this admission, Buffett appears to be looking for greener pastures for his company’s capital.
The third longest-tenured stock in Berkshire Hathaway’s portfolio is financial services giant American Express (NYSE:AXP), which has been a continuous holding since 1993. If you aren’t at least 28 years old right now, you weren’t alive the last time Buffett didn’t own AmEx.
Like most payment processors, American Express is part of a numbers game that’s very much in its favor over the long run. Even though recessions and contractions are a normal part of the economic cycle, periods of expansion tend to be measured in years, whereas recessions typically last a few months to a couple of quarters.
American Express is also what we can call a double-dipper. It generates revenue from merchants by processing transactions and also brings in a separate channel of revenue by issuing credit cards to consumers and businesses. This allows the company to collect fees and interest income, but can also expose it to credit delinquencies during contractions and recessions.
Like Wells Fargo, AmEx’s secret sauce has long been its connection to affluent cardholders. Well-to-do customers are less likely to change their spending habits when minor economic hiccups arise, meaning American Express’s cash flow tends to be a bit more secure than other credit card issuers.
With a cost basis of only $8.49 and an annual base payout of $1.72, Berkshire Hathaway is netting a hearty 20% yield on cost with AmEx.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.
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