Why Did Warren Buffett Pour Billions Into AAL Stock?
With the price of oil trading at $45.00 a barrel and down more than 50% from the recent highs seen in August 2014, Warren Buffett has taken notice. Buffett, considered the smartest investor of all time, poured billions of dollars into American Airlines Group Inc (NASDAQ:AAL) stock via his company, Berkshire Hathaway Inc. (NYSE:BRK.A).
According to Berkshire’s recent 13F filing, the firm purchased approximately 21 million shares of AAL stock. (Source: “Warren Buffett’s Berkshire Hathaway Discloses New Investments in Airlines,” The Wall Street Journal, November 14, 2016.)
Investors took notice of these actions, with shares trading up 4.4% in after-hours trading. The shares are currently trading at $45.34, up $1.94. Based on the current price, the yield is 0.88%, which pays out a dividend of $0.10 per quarter.
Why would Warren Buffett invest billions of dollars in AAL stock?
The number-one cost driver for airlines is the price of oil. Since August 2014, the oil price has been sliding, which means improved margins for airlines. With cheaper oil comes a greater possibility of adding more routes, provided there is more demand from customers. With more cash hitting the bottom line, it has fundamental investors such as Warren Buffett looking deeper into the company.
Before Buffett makes an investment, he must examine the balance sheet and see if the fundamentals going forward will increase over time. Other than the price of oil, AAL stock is increasing revenue by charging a bag check fee. Customers also have the choice of spending more onboard by buying or using services such as Wi-Fi.
Another reason for the investment is that Warren Buffett is famous for buying companies that have a high barrier to entry. Buffett loves to invest in companies that have a monopoly or a near-monopoly. AAL stock is part of an oligopoly, which means there is limited competition among a few airlines.
Dear Reader: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. We are 100% independent in that we are not affiliated with any bank or brokerage house. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose. The opinions in this content are just that, opinions of the authors. We are a publishing company and the opinions, comments, stories, reports, advertisements and articles we publish are for informational and educational purposes only; nothing herein should be considered personalized investment advice. Before you make any investment, check with your investment professional (advisor). We urge our readers to review the financial statements and prospectus of any company they are interested in. We are not responsible for any damages or losses arising from the use of any information herein. Past performance is not a guarantee of future results. All registered trademarks are the property of their respective owners
Sign up to receive our FREE Income Investors newsletter along with our special offers and get our FREE report:
5 Dividend Stocks to Own Forever
This is an entirely free service. No credit card required. You can opt-out at anytime.
We hate spam as much as you do.