Warren Buffett-led Berkshire Hathaway recently made headlines with its decision to sell 9.29 million shares of Chevron stock, marking the continuation of a trend where Berkshire has been gradually reducing its stake in the integrated oil and gas major. The move raises questions about the rationale behind this decision and what it means for investors.
Chevron, which became Berkshire Hathaway’s third-largest public equity holding within a short span of time, saw its position reduced by 7% in the most recent quarter. This comes after a significant reduction of 20.8% between the end of 2022 and the beginning of 2023. While Berkshire Hathaway is maintaining stability in its other top holdings, the focus on Chevron stands out.
Understanding Berkshire Hathaway’s strategy sheds light on these recent moves. The 13F filing released on August 14 revealed that five companies comprise a substantial 79.6% of Berkshire’s public equity portfolio. Of these, Chevron is the only one that witnessed a notable change in share count between March 31 and June 30. So, should investors follow Buffett’s lead and divest from Chevron, or does the company still hold promise?
Berkshire Hathaway Energy (BHE), a key subsidiary of Berkshire Hathaway, plays a role in deciphering this move. BHE’s interests in utilities and oil and gas assets might have influenced Berkshire’s decision to initially invest in Chevron in late 2020, a move that surprised some given the volatility of the oil and gas sector compared to safer options like consumer staples.
Warren Buffett’s reputation as a value investor adds depth to the decision. The turmoil faced by the oil and gas industry in 2020 piqued his interest, especially as prices plummeted. This is evident from Berkshire’s acquisition of Dominion Energy’s oil and gas assets at a favorable price, coinciding with Chevron’s dip to a 10-year low in early 2020. Seizing the opportunity, Berkshire started accumulating Chevron shares.
The most significant increase occurred in the first quarter of 2022 when Berkshire’s Chevron position surged from 38.25 million shares to 161.44 million shares. Benefiting from Chevron’s 53% gain in 2022, Berkshire enjoyed substantial success. However, the stock’s stagnation amid the rebound of growth stocks in 2022 led to Berkshire’s decision to divest.
In the first half of 2023, Berkshire sold 39.86 million Chevron shares, a 24.5% decrease from the previous year’s end. A glance at Chevron’s stock price progression accentuates the brilliance of Berkshire’s strategic decisions over time.
Although Warren Buffett is known for his long-term approach, the somewhat erratic trading of Chevron seems counter to this philosophy. However, zooming out reveals a more sensible perspective. The initial attraction to Chevron likely stemmed from its undervaluation and strong position in an industry well understood by Berkshire. Tripling down on Chevron in 2022 was driven by the expectation of increased energy security demand, greater U.S. oil and gas production, and increased natural gas imports.
While Chevron’s current valuation is less compelling than during its lower-priced phase, Berkshire’s continued ownership and reduced pace of divestment suggest a favorable outlook. Additionally, Chevron’s 3.8% dividend yield, surpassing several major companies, adds to its attractiveness. This makes holding the stock appealing, especially if Berkshire anticipates more growth compared to other high-yield holdings.
Taking a holistic view, Berkshire’s decisions align with its long-term objectives. The extensive buying spree in early 2022 rationalizes the subsequent trimming of the position as the risk-reward dynamics shifted. For Chevron investors, there’s no urgency to sell as the company thrives with its attractive valuation, solid dividend yield, and strong balance sheet.
Investors seeking quality dividend stocks would find Chevron a prudent choice. Its diversified position positions it to provide consistent value through dividends and share repurchases. Despite Berkshire’s sequential reductions, Chevron remains a substantial component of its portfolio, emphasizing its continued potential as an investment.
