by Dan Burrows | November 15, 2013 11:30 am
Warren Buffett and Berkshire Hathaway (BRK.A, BRK.B) just added a huge stake in blue-chip energy giant Exxon Mobil (XOM). Berkshire Hathaway holdings now include XOM stock worth $3.45 billion … and given the size of the position, it was almost certainly a move by Warren Buffett himself.
After all, XOM stock now represents a sizable portion of Berkshire Hathaway holdings, which grew under Warren Buffett to $92 billion last quarter from $89 billion, an increase of 2.7%.
XOM stock has languished so far this year, hurt by diminishing production, plunging prices for natural gas and stagnant oil prices.
But then, Warren Buffett loves to add assets to his Berkshire Hathaway holdings when they’re out of favor — and certainly, Exxon fits that bill.
As the chart below illustrates, XOM stock is up just 7.7% for the year-to-date, lagging the broader market by nearly 18 percentage points.
Other attributes of XOM stock that might have led Warren Buffett to add it to Berkshire’s stable are its respectable dividend yield of 2.8%, and the fact that it’s as blue-chip as they come.
After all, Exxon Mobil — a component of the Dow Jones Industrial Average — is a $407 billion company as measured by market capitalization. And now, Warren Buffett’s move into XOM stock means that Berkshire Hathaway holdings now include roughly 1% of the largest oil and gas company in the world.
Interestingly, Warren Buffett is generally against share buybacks because companies usually overpay — Berkshire Hathaway has a hard maximum price it will pay for its own stock — and XOM seems to be starting to lean in that direction. Although Exxon Mobil is always active on the buyback front, it has reduced its voracious appetite for XOM stock significantly.
Exxon Mobil has spent more than $200 billion on XOM stock buybacks over the past decade. However, the company is currently doling out about $3 billion a quarter for XOM stock, down from $5 billion a quarter over the last couple of years.
InvestorPlace is bullish on XOM stock these days, too. It looks like the kind of classically undervalued security that Warren Buffett is always looking for to bolster his Berkshire Hathaway holdings.
For one thing, Exxon Mobil actually saw a small increase in production last quarter, and it would be just like Buffett to add XOM at an inflection point.
Furthermore — and importantly for Warren Buffett and his criteria for Berkshire Hathaway holdings — is that Exxon Mobil is a cash machine, something that only adds value to XOM stock. Despite a 2% drop in revenues and an 18% drop in profits last quarter, Exxon Mobil still managed to make more money in three months than many companies make in an entire year.
And, of course, most important of all is what XOM stock is fetching these days. Warren Buffett was able to pick up XOM stock for Berkshire at a cost of only about 11 times forward earnings. That makes XOM stock significantly cheaper than industry rivals, as well as the S&P 500.
Finally, as much as XOM stock has underperformed this year, there is no better vote of confidence than having Warren Buffett himself add your stock to Berkshire Hathaway holdings.
In addition to the new position in XOM stock, other large Berkshire Hathaway holdings include Wells Fargo (WFC), General Motors (GM), International Business Machines (IBM), Walmart (WMT), American Express (AXP), Coca-Cola (KO) and Procter & Gamble (PG).
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2013/11/warren-buffett-xom-berkshire-hathaway-holdings/
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