Warren Buffett is widely regarded as the most successful value investor of all time, making his Berkshire Hathaway (BRK-A ) (BRK-B ) one of the most closely watched holding companies today. It recently came to light that the Oracle of Omaha loves cheap airline stocks and he’s has gone to great lengths to gain exposure to this evolving industry.
Berkshire made headlines in February, by disclosing it had purchased millions of shares of U.S. airlines worth a combined $5.5 billion. This included 53 million new shares in American Airlines (AAL ), 24 million in Delta Air Lines (DAL ) and 24 million in United Airlines (UAL ). However, the recent debacle over overbooking and the apparent ill-treatment of a passenger on board a United Airlines flight led to a significant drop in share price, causing a $24 million drop in Buffett’s airline holdings in a single day.
All purchases were made during the fourth quarter of 2016, although the Securities and Exchange Commission’s (SEC) Filing Detail did not indicate whether the shares were purchased before or after the November 8 presidential election. Click here to compare Berkshire Hathaway’s recent picks with the best major airline dividend stocks in the industry today.
With the latest acquisitions, airlines now represent 7.5% of Berkshire’s total stock holdings and less than 1% of total assets under management. By comparison, Berkshire remains significantly more exposed to sectors such as financial services, utilities and transportation. In terms of outstanding shares, Berkshire’s largest holdings are Wells Fargo, Coca-Cola Co and Kraft Heinz Co, at more than 325 million shares each.
Berkshire’s portfolio has the following outstanding shares, as reported in the company’s 13-F filing on February 14, 2017.
|Company||Symbol||Holdings||Holding value (Billions)||Stake|
|Sirius XM Holdings Inc.||(SIRI )||166,639,941||$0.85||82.37%|
|Kraft Heinz Co||(KHC )||325,634,818||$30.31||26.71%|
|Davita Inc||(DVA )||38,565,570||$2.66||19.80%|
|American Express Company||(AXP )||151,610,700||$12.09||16.63%|
|Phillips 66||(PSX )||80,689,892||$6.29||15.70%|
|Moody's Corporation||(MCO )||24,669,778||$2.79||12.90%|
|Verisign, Inc.||(VRSN )||12,952,745||$1.08||12.52%|
|Axalta Coating Systems Ltd||AXTA||23,324,000||$0.69||9.73%|
|Wells Fargo & Co||(WFC )||479,704,270||$27.73||9.66%|
|The Coca-Cola Co||(KO )||400,000,000||$16.71||9.25%|
|United Continental Holdings Inc||(UAL )||28,951,353||$2.17||9.06%|
|American Airlines Group Inc||(AAL )||45,544,854||$2.11||8.76%|
|Liberty Global plc - Class A Ordinary Shares||LBTYA||22,895,751||$0.85||8.66%|
|International Business Machines Corp.||(IBM )||81,232,303||$14.73||8.56%|
|Delta Air Lines, Inc.||(DAL )||60,025,995||$3.03||8.02%|
|Southwest Airlines Co||(LUV )||43,203,775||$2.53||6.87%|
|WABCO Holdings Inc.||(WBC )||3,368,394||$0.38||6.17%|
|Torchmark Corporation||(TMK )||6,353,727||$0.49||5.36%|
|U.S. Bancorp||(USB )||85,063,167||$4,69||5.03%|
|Restaurant Brands International Inc||(QSR )||8,438,225||$0.47||4.17%|
|Liberty Sirius XM Group||LSXMK||22,236,109||$0.86||4.13%|
|Charter Communications, Inc.||(CHTR )||9,443,491||$3.09||3.49%|
|M&T Bank Corporation||(MTB )||5,382,040||$0.91||3.49%|
|General Motors Company||(GM )||50,000,000||$1.85||3.37%|
|Goldman Sachs Group Inc||(GS )||10,959,519||$2.71||2.80%|
|Bank of New York Mellon Corp||(BK )||21,671,969||$1.02||2.06%|
|Graham Holdings Co||(GHC )||107,575||$0.06||1.90%|
|Liberty Sirius XM Group||LSXMA||10,058,800||$0.40||1.89%|
|Monsanto Company||(MON )||8,041,784||$0.91||1.82%|
|Liberty Global plc - Class C Ordinary Shares||LBTYK||8,630,988||$0.31||1.34%|
|Apple Inc.||(AAPL )||57,359,652||$7.84||1.09%|
|Costco Wholesale Corporation||(COST )||4,333,363||$0.77||0.98%|
|Verisk Analytics, Inc.||(VRSK )||1,563,434||$0.13||0.93%|
|Twenty-First Century Fox Inc||(FOXA )||8,951,869||$0.27||0.48%|
|Mastercard Inc||(MA )||4,934,756||$0.55||0.46%|
|Visa Inc||(V )||10,562,460||$0.93||0.45%|
|Sanofi SA (ADR)||(SNY )||3,905,875||$0.17||0.15%|
|General Electric Company||(GE )||10,585,502||$0.32||0.12%|
|Mondelez International Inc||(MDLZ )||578,000||$0.03||0.04%|
|Wal-Mart Stores Inc||(WMT )||1,393,513||$0.10||0.04%|
|Johnson & Johnson||(JNJ )||327,100||$0.04||0.01%|
|Procter & Gamble Co||(PG )||315,400||$0.03||0.01%|
|United Parcel Service, Inc.||(UPS )||59,400||$0.01||0.01%|
|Verizon Communications Inc.||(VZ )||928||$0.00005||0.00%|
Click here to track the latest ex-dividend dates of the top eight regional airline stocks. By going Premium, you can also track the latest DARS ratings for these and other stocks.
Buffett’s Change of Heart
Buffett’s position on airlines marks a significant departure from his previous stance, where he called the industry “the worst sort of business.” That all changed when President Trump was voted into the White House, bringing with him the promise of steep tax cuts. This is a major tailwind for airlines, which face high-income tax rates.
Trump reiterated his pledge to cut taxes in a meeting with airline executives on February 9. The president promised to announce “big league” tax reforms in the not-too-distant future to strengthen U.S. business and encourage multinationals to repatriate more of their overseas profits. Analysts at Goldman Sachs (GS ) have predicted that the new policy would encourage S&P 500 companies to repatriate about one-fifth of the $1 trillion in cash they hold overseas.
Buffett’s newly acquired airline stocks are not particularly strong dividend plays, but they are expected to report double-digit increases in earnings per share next year as the industry consolidates. Drawing parallels to railroads, Berkshire Vice Chairman Charles Munger says the airline industry is down to four big companies, which will boost profitability and overall performance. After hemorrhaging money for decades, the industry is poised for steady growth as the big-four airlines dominate the market. Dividend seekers can track high-quality airline stocks using the Dividend Stock Screener tool, which performs a comparative analysis based on 16 specific parameters.
However, one also needs to factor in the reputation of the bigger airlines when it comes to customer experience. Failure by United Airlines to ensure a positive experience for its customers cost the company to the extent that its share price dropped by 1.13% in a single day. Investors’ reaction led to a situation in which Buffett’s stake in the company was, at one point, down by more than $90 million, if you consider the intra-day low of the stock.
According to U.S. bank Morgan Stanley (MS ), Berkshire may also be eyeing a full-scale acquisition of one of the big-four airline stocks. Bank analysts speculated that Southwest could be a “plausible candidate,” given the company’s free cash flow and existing cost structure.
In addition to tax cuts, airlines are also set to benefit from increased infrastructure spending under the new GOP administration. Trump has pledged $1 trillion on infrastructure over the next ten years. The infrastructure binge includes airport revitalization.
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The Bottom Line
Despite economic uncertainty, rising fuel prices and a sharp rise in terrorist attacks, demand for air travel continues to grow. As the vast U.S. airline industry continues to consolidate, Berkshire Hathaway is in prime position to capitalize with its latest acquisition.
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