Warren Buffett Bought $31.3 Billion of This Stock

Warren Buffett, he's the chairman and CEO of Berkshire Hathaway, and he's considered by many to be hands down the greatest investor of all time. It should come as no surprise that he runs one of the most closely filed investment portfolios in the entire world. His investment decisions have the power to move markets, with thousands of smaller investors following his every move. His portfolio is currently valued over 300 billion dollars and consists of some of the best stocks in the world: Apple, Amazon, Coca-Cola, and Bank of America, just to name a few.

Buffett has been quietly buying tens of billions of this stock with surprisingly very little attention. Anyone who follows Buffett knows that he only buys a stock when you can buy that stock for far less than what the stock is truly worth. Buffett is no different than the rest of us; he loves getting a good deal. Make sure to stick around to the end of the video to learn about how you can apply the lessons of this Warren Buffett purchase to your own investment portfolio.

As a long-time Berkshire Hathaway shareholder myself, I love this investment Warren Buffett decided to make. However, with that being said, this big investment doesn't even show up in his stock portfolio. He spent 31.3 billion dollars on this stock but is only known to people who closely follow his company, Berkshire Hathaway. That is because his biggest investment of the past 12 months hasn't been a traditional equity investment in an outside company or the purchase of an entire company. The over 30 billion dollars in purchases have been Berkshire Hathaway's own stock.

Yeah, that's right; Warren Buffett's favorite stock over the past year has been his own. You know we are in a crazy market when the greatest investor of all time can't find an investment he likes better than repurchasing his own company's shares. Here's what Buffett had to say in his most recent annual letter about why he decided to repurchase shares of Berkshire Hathaway last year:

"We demonstrated our enthusiasm for Berkshire's spread of properties by repurchasing the equivalent of 80,998 A shares, spending 24.7 billion dollars in the process. That action increased ownership in all of Berkshire's businesses by 5.2% without requiring you to so much as to touch your wallet. Following criteria Charlie and I have long recommended, we made those purchases because we believe they would both enhance the intrinsic value per share for continuing shareholders and would leave Berkshire with more than ample funds for any opportunities or problems it might encounter. In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds through purchases when prices have risen than when they have tanked. Our approach is exactly the reverse."

There are two main reasons Warren Buffett is repurchasing shares. The first being that, in Buffett's opinion, Berkshire Hathaway stock was trading at a significant discount to its intrinsic value at the time of repurchases. Put a more simple way, Berkshire stock was worth more than what Buffett paid for it, meaning that the remaining shareholders of Berkshire Hathaway were better off as a result of the repurchase.

The second reason isn't as clearly apparent and was even mentioned in Buffett's comments. Buffett has said in the past that his favorite use of capital for Berkshire Hathaway is buying stocks and entire businesses. However, with Berkshire Hathaway having a market cap of nearly 650 billion dollars, Buffett has been unable to find a large acquisition that really moves the needle, as he likes to put it. The company is just so big that only really large acquisitions can have substantial impact. This fact, coupled with high valuations for potential acquisitions that Buffett doesn't want to pay, has meant that there haven't been many acquisitions.

So, as a result, a lot of cash has been sitting on the company's balance sheet—way more than what is necessary to run the company. So while Berkshire stock may not have been overwhelmingly cheap, repurchasing shares was better than just leaving that cash on the balance sheet, in Buffett's opinion.

But before we go any farther, it is important to understand what exactly share repurchases are and why a company would do them. The best way to do this is to use one of Warren Buffett's most famous investments, Coca-Cola, as an example. In 2020, Coca-Cola's profit was nearly 8 billion dollars. That's definitely a lot of money. Coca-Cola management had a few different choices with what they could do with that money.

The first thing would be to reinvest those profits in the business. That could come in the form of new products, additional advertising, or building a new headquarters. Another option for that money would be something more commonly referred to as inorganic growth. That is where a company goes out and buys another company in order to grow their own business. In this example, it would be Coca-Cola going out and buying a beverage brand, like they have in the past with Vitamin Water or Dasani.

If, for whatever reason, these first two options don't make sense for the company, the company can decide to do something that's commonly referred to as returning capital to shareholders. Now, this can take two forms, the first being dividends. That is where a company pays out a portion of its profits to shareholders, and in the Coca-Cola example, Coca-Cola pays an annual dividend of 1.68 cents per share. That means for every share of Coca-Cola you own, they will send you payments of 1.68 over the course of a year, normally paid out in payments spread out across three months. Not too bad for not doing any work besides just owning the stock.

Now if the company doesn't want to pay a dividend or still has a lot of cash left after paying a dividend, they can decide to do something called buying back their own stock. This reduces the total number of shares outstanding and, as a result, makes each share of stock more valuable. So now is the perfect time to listen to this clip of Warren Buffett describe why he likes share repurchases so much, using Coca-Cola as an example.

"Coca-Cola is probably, in my view, among businesses that I can understand, it's the best large business in the world. I mean, it is a fantastic business and we love it when Coke repurchases shares and our interest goes up. We owned 6.3% of Coca-Cola in 1988 when we bought in; we actually increased that a little bit a few years later. But if they had not repurchased shares, we probably would own about 6.7% or 6.8% of Coke. Now, as it is, we own a little over 8% through repurchases. They're going to be about a billion eight-ounce servings of Coke sold around the world, our Coca-Cola products sold around the world today. 8% of that is 80 million, and 6.8% of 68 million. So there are 12 million extra servings for the account of Berkshire Hathaway being sold around the world, and they're making a little over a penny a serving. So, you know, that gets me kind of excited. The average person just doesn't understand how powerful share repurchases can be for long-term owners."

Let's use a hypothetical company for this example to show how share repurchases can be great for long-term investors. Let's say Company ABC Corporation has 100 shares outstanding and earns a thousand dollars a year in profit. That means each share represents 10% of that annual profit. This is calculated by taking the thousand dollars in annual profit and dividing it by 100 shares outstanding. Pretty straightforward, right?

Now let's throw share repurchases into the mix. Let's say that ABC Corporation decides to use its cash to repurchase 10 of its shares outstanding. Put another way, ABC is repurchasing 10 shares. This means that the company now has 90 shares outstanding after these repurchases, calculated by taking 100 shares originally outstanding and subtracting the 10 shares the company repurchased.

Now let's say next year ABC made another thousand dollars in annual profit. Now, doing the same math as before, each of the 90 remaining shares represents 11.11 cents of that annual profit. That is because the annual profit is split among a fewer number of shares, making each share worth a larger percentage of the company. This example clearly demonstrates why share repurchases can be viewed so favorably.

This is how Warren Buffett was able to grow his ownership stake in Coca-Cola from less than seven percent when he first bought his shares in 1988 to 9.3 percent now—all without buying a single additional share. Buffett benefited both from Coca-Cola continuing to grow its overall total annual earnings and Buffett's percentage ownership of those earnings increasing through Coca-Cola repurchasing its own stock.

So, there we have it. I hope you learned something new in this video. Make sure to like the video and subscribe to the channel because it is my goal to make you a better investor. Talk to you soon.