According to Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) latest 13F report, at the end of March 2022, the conglomerate owned just over 150 million shares of financial services group American Express Co. (AXP, Financial). The position was worth around $28 billion, accounting for 7.8% of the equity portfolio.
At the end of March, Berkshire's U.S. equity portfolio was worth $363 billion overall, excluding cash and international equity holdings.
This holding is a fantastic case study of how Warren Buffett (Trades, Portfolio)'s long-term investment mentality and sensible capital allocation policies by successive management teams (at American Express) have created a vast amount of wealth for Berkshire's investors.
A long-term holding
Amazingly, the Oracle of Omaha has not bought a single share of American Express since the late 1990s. At that point, the company owned a little over 10% of the financial services group. However, the ownership interest has crept above 20% as the company has steadily repurchased its own shares.
To put it another way, Berkshire's ownership of American Express's earnings has doubled over the past three decades without the conglomerate spending a single dollar. Over the same period, the financial services company's earnings have also increased substantially. The company is earning more, and Berkshire has a more significant share of those earnings.
This is something Buffett touched on at the 2022 annual meeting when extolling on the power of share repurchases and how they can create value for investors.
Berkshire has been repurchasing its stock in recent years, spending around $60 billion of its own capital to reduce the number of outstanding shares. The Oracle of Omaha has been spending this money as he has not found any other opportunities on the market (although this changed at the beginning of 2022).
It is estimated that Berkshire's ownership of American Express exceeded 20% in April. This is a bit of a landmark for both companies. Anything above 20% and the larger corporation may have to switch to the equity method of accounting for its investment. Put simply, this means Berkshire will have to book its 20% share of the financial services company's earnings as income. This accounting change could boost the bottom line by $1 billion a year based on the fact that American Express earned $8 billion last year. Currently, the shares generate dividend income of $260 million a year.
It is not clear what this means for either company as Berkshire and American Express have signed agreements stating the insurance conglomerate's stake will remain passive.
"In 1995, we signed an agreement (as amended from time to time) with Berkshire designed to ensure that Berkshire's investment in our company will be passive," American Express notes in its 2021 proxy statement. "Berkshire and its subsidiaries have also agreed to follow our board's recommendations in voting company common shares they own up to 17% as long as Mr. (Stephen) Squeri is our CEO and Berkshire owns 5% or more of our voting securities."
Creating value with other people's money
I do not want to speculate what Berkshire will do with its larger stake and if this will lead to changes in either business. Nevertheless, this trade shows how much value investors can create just by buying and holding companies that throw off cash and return it to investors. Berkshire has essentially doubled its stake in American Express without spending a dollar while the company has continued to grow.
Further repurchases will only help Berkshire grow its stake further in the years ahead. At some point, the conglomerate could end up owning all of the company without spending anything.
It is often said one of the best ways to build wealth quickly is to use other people's money. Buffett has been able to leverage this principle here.
