Title: After Berkshire Hathaway Ditched 235 Million Bank of America Shares, Here's Its New Top Investment
In the recent quarters, Warren Buffett and his team at Berkshire Hathaway have garnered attention for selling more stock than they've been buying. Buffett's decision to offload substantial portions of his Apple and Bank of America positions, among others, has sparked intrigue about his views on the market's current high valuations.
Per Berkshire's 13-F filing with the Securities and Exchange Commission for the third quarter, the conglomerate divested over 235 million shares of Bank of America stock. This megabank has been a part of its portfolio since 2011, but these sales pushed it down to Berkshire's third-largest stock holding.
American Express now holds the second position in Berkshire's portfolio. The company has been a part of its holdings for three decades, and it's likely to remain a core position for the long term. Let's delve into why.
Buffett's Affinity for American Express
American Express boasts a rich business history spanning 174 years, but it wasn't until the 1950s that it entered the credit card market. Smart strategies under then-CEO Ralph Reed positioned the company's card as a premium offering, setting the annual fee one dollar higher than its rival, Diner's Club.
Over the years, American Express's powerful brand has attracted a high-spending, upscale customer base. From its invite-only Black Card to its more affordable Platinum Card with a $695 annual fee, its strong brand strategy has set it apart.
Buffett and Charlie Munger, his trusted right-hand man, first invested in American Express in the 1990s, recognizing its strong brand and solid business model. It's no wonder the company has remained a mainstay in Berkshire's portfolio ever since.
When Stephen Squeri took the reins as CEO in 2018, Buffett reminded him that "The most important thing about American Express is the brand and the customers that aspire to be associated with the brand."
American Express: A Unique Business Model
With $1.1 trillion in U.S. transaction volume in 2023, American Express is the third-most-used card brand, trailing only Visa and Mastercard. While Visa and Mastercard function as open-loop payment networks, American Express operates on a closed-loop system, processing transactions and lending directly to its credit card customers.
Although this openness to credit risk can be a concern, it also benefits from rising interest rates. From 2021 to 2023, American Express's net interest income increased by $5.4 billion, a substantial 69% increase.
Investors should be aware of this premium valuation, as American Express typically trades at a discount to Visa and Mastercard. However, its high-end customer base has helped the company weather tough economic times better than many other financial institutions.
An Enduring Investment Choice
American Express has been a cornerstone of Berkshire Hathaway's portfolio for three decades, thanks to its robust brand, strong business model, and consistent revenue stream. Buffett's value investing philosophy aligns perfectly with this long-term investment, and the company's dividend income adds significant value to Berkshire Hathaway's portfolio.
While there's always some credit risk involved, American Express's premium customer base helps it ride out tough economic times, making it an excellent stock for long-term investors.
Buffett's decision to reduce Berkshire's position in Bank of America but maintain a strong hold in American Express underscores his belief in the latter's financial stability and growth potential in the realm of investing and finance. The consistent revenue stream and premium customer base of American Express, as mentioned by Buffett, continue to make it an enduring investment choice for Berkshire Hathaway.
Despite the unique business model of American Express, which involves processing transactions and lending directly to its credit card customers, the company's high-end customer base has allowed it to mitigate potential credit risks and perform well, even in challenging economic conditions.
