PORTFOLIO POINT: Berkshire Hathaway's recent share buyback, combined with the strong Australian dollar, means it could be a good time to invest in the Oracle of Omaha.
Warren Buffett is – still – the world’s greatest investor, and his US-listed company Berkshire Hathaway is the investing public’s passageway to his success. Just take a moment to re-examine Berkshire Hathaway’s long-term performance – a 47-year record of average annual increases in the company’s per-share book value of 19.8%.
Sure, the stock has lost some of its exceptional allure in recent times. Over the last two years, the company has returned -5.87% against 17.79% for the broader S&P 500. But what we are talking about here is the definitive long-term investment, and 20% per year – year-in, year-out – over half a century is hard to beat.
Moreover, Buffett and his team are the ultimate contrarian investors, buying low and selling high through endless investment cycles. As direct descendants of the father of value investing, Benjamin Graham – who the younger Buffett worked alongside – the skills base within the company should be highly valued by any serious investor.
In recent times, some of the shine has come off the Berkshire Hathaway brand name: Buffett has backpedalled in relation to his position on derivatives, and there has been an embarrassing false start in finding a CEO replacement (likely heir-apparent David Sokol quit after questions were raised over his purchase of shares in Lubrizol, a company Berkshire acquired shortly afterwards).
But then again, some of the old master’s more recent deals – especially his darkest hour GFC-deal with Goldman Sachs – remain textbook examples of investing at its most successful and sophisticated. It is estimated Buffett made a profit of $3.7 billion on the Goldman Sachs deal, after the bank paid $5.65 billion to buy back preference shares. Buffett received $5 billion for the shares, a $500 million early repayment fee, $1.25 billion in dividends already paid and $1.9 billion in paper profits on stock appreciation (warrants).
Put simply, investing in Berkshire Hathaway provides exposure to Buffett and his team’s ability to put together a portfolio of strongly performing companies with little debt, and to let those companies generate wealth.
For many years now, Berkshire Hathaway has been able to access some of the best corporate deals, on terms not available to 'retail’ investors, and as recently as last year invested in Bank of America preferred shares, paying a 6% dividend. It is the opportunity for any investor to partake in future deals of this nature that makes Berkshire Hathaway so attractive.
And finally, Berkshire Hathaway is an iconic slice of capitalism. If you own a share, or shares, Warren Buffett is writing to you in his annual report, and inviting you to the famous Berkshire Hathaway AGM in Omaha, Nebraska – the 'Woodstock for capitalists’.
So why invest in Berkshire Hathaway now?
- The first contemporary factor is the Australian dollar: at more than $US1.05, the cross rate is at 20-year highs. A high dollar provides more purchasing power overseas. Just as it is a great time to holiday overseas, it is also a great time to think about investing overseas. In buying Berkshire Hathaway (as with any major US stocks bought by an Australian resident), you are enjoying an effective discount on US dollars. Moreover, if the Australian dollar begins to fall, then your US investment will go up in local currency value. (To read more on potential US blue chip investments, read Michael Feller’s Ten-gallon stock tips.
- The second factor is crucial: last year, Berkshire Hathaway instituted a share buyback. This is where a company uses excess money to buy back and then cancel some of its own shares. Companies typically do this when they feel that their shares are undervalued, and the best way to increase earnings for investors is to use spare cash to buy back some of these undervalued shares. Buying back (and cancelling) shares means future company earnings are divided among fewer shares, thus benefiting investors. This in itself is a good sign – however at Berkshire Hathaway, there is a twist. Think about who is doing the buying: Warren Buffett, one of the all-time great value investors, thinks his shares are such good value they are worth buying back. Buying shares in Berkshire Hathaway currently puts you on the same side of the trade as Warren Buffett – something that history says is a good place to be.
Thanks to online broking, at a functional level buying overseas shares has never been easier, with most brokers and some online/discount brokers offering overseas trading options. Add this to the fact that Berkshire Hathaway shares do not pay dividends – which keeps the foreign income tax issues simple – and buying and owning shares in Berkshire Hathaway is relatively straightforward.
One of Warren Buffett’s jokes, targeted at concerns about his age (81), is that he ages 'less in percentage terms’ each year than the average company chairman. Jokes aside, this is an issue that any potential investor needs to consider – what will happen when Buffett and Munger are no longer at the helm?
If there is one enduring concern for Berkshire Hathaway, it is the issue of succession. With Munger already well out of day-to-day operations, Buffett teased the international investment community only a fortnight ago when he said he had 'found’ his successor, but would not say who it was!
Nevertheless, Warren Buffett’s regular declaration – that much of the reason for the success of Berkshire lies in the skills of the managers who run the underlying businesses – must provide some reason for optimism. That said, it would only be reasonable to think that there is a 'Buffett premium’ associated with the extraordinary returns he has produced for investors over a long period of time, and when he ceases to be associated with the company there will be a drop in the share price. The current price of Berkshire Hathaway shares is $118,895.
Some time ago, a 'B Class’ share was created, which trades with a much lower share price – currently $79.17 – to allow investors with less than $118,895 to invest in Berkshire Hathaway. Investors in 'B Class’ shares receive 1/1500th of the earnings of an 'A Class’ share, and the share price is almost exactly 1/1500th of its predecessor. These 'B Class’ shares mean that investors do not have to invest through managed investment vehicles, such as the Australian LIC 'Global Masters Fund’, which piggyback on Berkshire’s reputation by offering a portfolio largely made up of Berkshire Hathaway shares. Investors can invest directly in Berkshire Hathaway (through the 'B Class’ shares), saving the cost of fees charged by an intermediary investment manager.
Owning a slice of Berkshire Hathaway is an investment with a heck of a story attached – a 47-year record of extraordinary returns, with Warren Buffett and his team as your investment manager. With a high Australian dollar and Buffett buying back his own shares, there are reasons to think that it might be a reasonable time to invest. Investors, however, should keep in mind the link between Berkshire Hathaway’s reputation and the long-term management of Buffett and Munger, and what might happen when they are no longer associated with the company.
Scott Francis is an independent financial adviser based in Brisbane.