Late last week, Berkshire Hathaway Inc. (NYSE:BRK.A) — the infamous multinational holding company led by iconic CEO Warren Buffett — released the updated list of its equity holdings as reported on SEC form 13F, a quarterly filing requirement for institutional investment managers with more than $100 million in assets.
Considering Warren Buffett’s five-plus decades of successful investing and the fact that Berkshire Hathaway stock has grown to become the most expensive of any company traded on a U.S. exchange (shares of BRK.A currently trade above $219,000 apiece), it’s no surprise when Wall Street analysts pore over every minute detail of the report looking for an inkling of insight.
The news that’s had the Street buzzing was Warren Buffett’s increased positions in Wells Fargo & Co (NYSE:WFC) and International Business Machines Corp. (NYSE:IBM), which currently occupy the No. 1 and No. 3 most valuable spots in Berkshire Hathaway’s $100-plus billion portfolio (the second-place spot, held by The Cola-Cola Co (NYSE:KO), remained static).
Most of the stocks in Berkshire Hathaway’s portfolio are in the consumer staples and financial sectors. For decades, Warren Buffett has eschewed the tech sector, which — at first glance — makes Berkshire Hathaway’s $400 million increase in IBM stock somewhat of an oddity. BRK.A now holds more than 79.5 million shares of IBM stock, valued at nearly $14 billion, and with 984.7 million shares outstanding Berkshire Hathaway’s stake in IBM is over 8%.
What’s So Special About IBM?
Typically known for avoiding technology companies, analysts were surprised when Warren Buffett first took up a position in IBM in the third quarter of 2011. His original investment was $10.8 billion.
While IBM stock hasn’t fared too well over the past several years — shares are just about where they were near the end of Q3 2011 when Warren Buffett was making his purchases — IBM dividends have continued to increase steadily, from 75 cents in 2011 to $1.30 as of this month. Some quick back-of-the-napkin math shows that Berkshire Hathaway’s 79.5 million shares will generate more than $103 million in IBM dividends.
Impressive, yes, but dividends aren’t the only reason Warren Buffett set his sights on IBM. Warren Buffett is a value investor and subscribes to the Benjamin Graham theory of buying stocks that are priced below their intrinsic values.
However, Warren Buffett’s philosophy isn’t too concerned with the market’s supply and demand complexities, and he’s been quoted as saying, “In the short term the market is a popularity contest; in the long term it is a weighing machine.”
Many analysts seem to agree with Warren Buffett’s bullish take on IBM stock, as 17 of the brokers providing recommendations to MarketWatch.com list IBM as a “hold” and two call it a “buy.” Over the past year, IBM’s trailing price-to-earnings ratio bounced between 11.5 and 15.5, but currently, IBM stock has a forward P/E ratio of 10.58. Compared to other tech behemoths, IBM stock is less expensive, and with a price/earnings-to-growth ratio of 2.45 and diluted earnings per share of $12 over the past year, holding a position (or increasing one) doesn’t look like a bad idea.
Buffett Is Looking Long Term
Patience is a virtue Warren Buffett has emphasized time and again, and Charlie Munger, Berkshire Hathaway’s vice chairman, has described the CEO’s patience as “almost inhuman.” In the case of IBM, Warren Buffett is clearly looking much longer term than most investors, and his big bets on IBM stock focus on its larger-scale operations, rather than its short-term activity.
Most notably, Warren Buffett’s focus is on IBM’s share repurchase program. Over the past three years, IBM has spent almost $40 billion buying back IBM stock; in 2014 alone, IBM spent $13.4 billion on buybacks. As the total number of shares outstanding continues to decrease, IBM management will be able to continue increasing dividends without actually paying more.
Further, as outstanding shares shrink, Warren Buffett’s 8% controlling interest in IBM will grow — without the need for Berkshire Hathaway to purchase more shares.
Warren Buffett’s hopes for the future of IBM aren’t secret. In a 2011 letter to BRK.A shareholders, the CEO stated, “We should wish for IBM’s stock price to languish throughout the five years,” as “what happens to the company’s earnings over the next five years is of enormous importance to us.”
Bottom Line on IBM Stock
If all else fails, asking yourself “What would Warren Buffett do?” usually points in a good direction.
After all, the Oracle of Omaha has earned that nickname by proving time and again that his strategies and methods indeed work. He’s currently the second richest person in the U.S. and the third richest in the world. The first and second spots are held, respectively, by Bill Gates, who requires no introduction, and Carlos Slim Helu, owner of Mexican telecom giant America Movil SAB de CV (ADR) (NYSE:AMX) and the largest shareholder of The New York Times.
With Warren Buffett’s guidance, Berkshire Hathaway is set to reap in excess of $100 million in dividends from IBM stock, and as Big Blue continues its share buyback program, BRK.A will become an even more powerful force to reckon with.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.