Instead of wondering who will become the next CEO of Berkshire Hathaway Inc. (NYSE:BRK.A) or what Warren Buffett wrote in his first tweet I think most investors, including me, would be more interested in the answers to questions like what companies he chooses and how he chooses them.
The annual Berkshire shareholders meeting was held earlier this month, a “small” affair attended by 35,000 of the faithful in Omaha, Nebraska.
In addition to providing various financial information, it featured a five hour long question and answer period where Warren Buffett and Vice-Chairman Charlie Munger tried to impart their collective investing wisdom onto the masses.
Working together for nearly a half century, Buffett and Munger have identified companies ripe to be acquired at reasonable prices and brought into the Berkshire Hathaway Inc. (NYSE:BRK.A) stable, as well as individual stocks that have returned tons of value to shareholders.
The result has been fantastic. Over the last 13 years there has been a three-fold increase in Berkshire’s stock price while the overall market has been relatively flat.
Some of the companies Berkshire owns outright include GEICO, NetJets, Benjamin Moore, Burlington Northern Santa Fe, and Fruit of the Loom.
Warren Buffett always said that the minimum holding period for a stock should be “forever.” He looks for companies that do not trade much above their book value and keeps them as long as they keep delivering value.
Three stocks that made the grade, and remain part of Buffett’s widely diversified portfolio today, are The Coca-Cola Company (NYSE:KO), International Business Machines Corp. (NYSE:IBM) and The Procter & Gamble Company (NYSE:PG).
This Coke is for you
The Coca-Cola Company (NYSE:KO) stock was first purchased by Mr. Buffett in 1988, and factoring in reinvested dividends it has gained more than 1,000% since. That’s almost double the overall market, although only half of the gain of Berkshire.
Part of the company’s success derives in part from great product recognition and a very wide economic moat. Who hasn’t heard of Coke? It is the world’s best-known and valuable brand, and is consumed in the vast majority of countries today.
Add in a great management team, lots of cash flow and a relatively inexpensive valuation compared to its peers and you get solid performance. You can’t go wrong owning Coke.
Speaking of dividends, The Coca-Cola Company (NYSE:KO) has been ratcheting them up every year for about half a century. Over the past 35 years each shareholder has collected a total of $29,300 for every $1,000 initially invested. Based upon its earning power and cash flow the company should be able to keep increasing them in the future.
When talking about International Business Machines Corp. (NYSE:IBM), Mr. Buffett says he doesn’t care if the share price actually goes up. He is content reaping rewards from the company stock buyback efforts. If the price remains where it is or lower the company spends less money when repurchasing shares on the open market. That means more money for investors like Mr. Buffett.
Since 2000, International Business Machines Corp. (NYSE:IBM) has lowered its share count by a third, in the face of sluggish revenue growth. The remaining shares are now worth more and EPS has increased as the result.