Berkshire Hathaway (BRK.A 0.32%) (BRK.B 0.05%) CEO Warren Buffett's financial track record is legendary. The Omaha, Nebraska, native has led his company to market-crushing success through multiple decades and informed and inspired millions of investors around the world.
Strikingly, the famous moneyman has delivered incredible returns while largely avoiding the time-honored practice of portfolio diversification. Buffett does advocate diverse holdings for less-experienced investors, calling it "protection against ignorance." But for investors who know what they are doing, he says it makes little sense. For this experienced investor, roughly 57.4% of Berkshire's $367.5 billion portfolio is concentrated in just two stocks.
Read on as two Motley Fool contributors explain why Buffett has placed huge bets on a duo of industry-leading companies.
Apple is an excellent innovator
Parkev Tatevosian: Surprisingly, the Oracle of Omaha has directed that 47.9% of Berkshire Hathaway's portfolio be invested in Apple (AAPL 0.28%) stock. I say surprisingly not because Apple is not worth investment, but because it's unusual to see even professional investors with such a concentrated portfolio. Nevertheless, I can understand why Warren Buffett likes Apple. It is one of the most innovative businesses worldwide, has a proven track record, and sells at a reasonable valuation.
Apple's reputation as a trusted brand among consumers helps it retain those customers longer and encourages them to pay a premium for its products and services. That brand loyalty helped Apple grow revenue from $183 billion in 2014 to $383 billion in 2023. When it comes time to upgrade an Apple device, people often stick with the brand, especially because of the ecosystem Apple has built around it. For example, the Apple Watch integrates well with Apple's iPhone and is improved with services from Apple's App Store. If you have any of Apple's products, that ecosystem increases the inconvenience of switching to a rival brand.
AAPL PE Ratio data by YCharts
The ability to charge a premium has proven to be profitable for Apple. The company's operating income rose from $53 billion to $114 billion in the abovementioned years.
And yet, throughout Berkshire's ownership of Apple stock where the stock price is up roughly 600%, the stock has never gotten too expensive to buy (when measured by the price-to-earnings ratio), giving Berkshire little reason to exit or dilute its investment in Apple stock. Perhaps those reading this article may consider following suit.
One of Buffett's greatest success stories
Keith Noonan: Today, Bank of America (BAC 0.20%) stands as Berkshire Hathaway's second-largest stock holding and accounts for roughly 9.5% of the company's portfolio. That represents an incredible vote of confidence from the Oracle of Omaha. But the stock actually started as a massive loser for Buffett.
After first purchasing BofA shares in 2007, Berkshire completely exited its position in the stock in the fourth quarter of 2010. The bank's earnings saw weak recovery on the heels of the Great Recession, and it faced ongoing pressures due to the housing crash, subprime mortgage crisis, and other macroeconomic risks.
Buffett contacted Bank of America CEO Brian Moynihan directly in 2011 with a surprising proposal to provide the struggling financial giant with investment capital. Ultimately, Berkshire wound up buying $5 billion worth of the bank's preferred stock.
Buffett's company also received warrants that would allow it to purchase 700 million shares of the bank's common stock at a price of $7.14 per share. It would up being an all-time great deal for Buffett.
In June 2017, BofA stock had seen a dramatic recovery and was trading above $24 per share. Berkshire announced that it would be exercising its warrants -- a move that immediately scored a $12 billion paper profit for the investment conglomerate. The announcement spurred even more short-term gains for the stock, and shares continued to climb in subsequent years -- but the deal has been even sweeter than a quick look at Bank of America's stock performance would suggest.
BAC Dividend data by YCharts
With the benefit of improving financial performance, BofA delivered impressive dividend growth since Buffett moved to exercise those stock warrants. The company currently pays an annual dividend of $0.96 per share -- working out to a 13.4% yield on those 700 million shares that Berkshire purchased at a share price of just $7.14.
Berkshire also purchased more of the bank's stock since its big warrant move and now owns roughly 1.03 billion shares of BofA stock. With its massive investment position, Buffett's company is generating almost $1 billion in annual dividend income just for sitting on its Bank of America stock. With the bank likely to deliver another payout increase next summer, Berkshire's annual dividend income from the stock will almost certainly cross the $1 billion threshold.
Despite a rocky start, Bank of America stock wound up being a massive winner for Buffett. There's a very good chance the financial services giant will remain Berkshire's second-largest holding in 2024 and beyond.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Noonan has no position in any of the stocks mentioned. Parkev Tatevosian, CFA has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
