If I had a dollar for every time the business media has written about Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) and its future without Warren Buffett over the past decade; I’d be a wealthy man. Berkshire stock is predictable that way.
The latest author to tackle this subject and the underperformance of Berkshire Hathaway stock is Barron’s reporter Andrew Bary.
Barry believes it’s time for the next generation to take over providing some ways in which the company can ease its way through a leadership transition.
I’ll quickly address each of them and then provide my two cents on the subject. Hopefully, by the end, you’ll be very enthusiastic about the future of Berkshire stock.
Hold an Investor Day
Bary believes that the company should have an investor day where the executives of the various divisions make presentations to those in attendance.
This would be an alternative to Buffett and Munger sitting on a stage answering questions for three hours.
In other words, show off the talent, rather than hiding them behind closed doors.
The problem with this approach is it puts Buffett in an awkward position. Why trot out the CEOs of the various businesses when the real champions are the employees on the front lines at See’s Candies and the like?
Buffett is the antithesis of Jamie Dimon. If he thought it would help shareholders wrap their arms around the entire business providing a sustainable buy-and-hold mentality, he already would have done it.
Share the Annual Letter Writing
This one’s easy to respond to.
No one reads the annual letter for Tony Nicely or Matthew Rose’s opinion. Not now, not ever. That goes for everyone who isn’t named Warren Buffett. In this way, he kind of is Berkshire stock.
Once Buffett’s gone there will be plenty of options to fill the annual letter. However, most investors only care about what the CEO has to say, and even then it’s debatable given most are merely PR pieces for the company.
Buy Back Berkshire Stock
This one is a trendy one given most every company is currently repurchasing shares due to the extra cash available from the corporate tax rate cut.
Bary argues Buffett should raise the threshold at which he will buy Berkshire stock from 1.2 times book value to 1.3 times book value.
Berkshire’s book value at the end of March was $140.79, which means the maximum share price the Oracle of Omaha would pay for Berkshire Hathaway’s Class B stock increases by $14.08 to $183.03, which is within spitting distance of its current share price.
Buffett is on record as liking share repurchases when done well so it’s possible he might listen to this recommendation.
However, I wouldn’t bet on it because it sets a precedent for future increases, something I’m sure Berkshire Hathaway wants to avoid.
Consider Paying a Dividend on Berkshire Stock
A dividend is probably the least likely of Bary’s ideas to make the light of day.
Why?
For Berkshire Hathaway to pay a dividend signals to investors that it’s got no new ideas for growing its business. If that happens, you might as well break up the company.
That’s not to say Buffett’s against dividends. Precisely the opposite is true. He loves the $700 million Berkshire Hathaway will receive from Apple Inc. (NASDAQ:AAPL) in 2018.
If you want to learn more about why Buffett doesn’t pay dividends, read this.
Give More Details on the Investment Portfolio
It’s a lot like the point about having an investor day; it’s overkill.
If you go into the 10-K, Page 9 lists the 15 largest holdings with both the actual cost ($74.7 billion) and market value ($170.5 billion) as of December 31, 2017.
For example, Berkshire Hathaway paid $2 billion for Southwest Airlines Co (NYSE:LUV) some time over the past two years and it was worth $3.1 billion at the end of December.
Buffett initiated a position in LUV sometime in the last three months of 2016.
How much more do you need to know?
Get More Flexible with Acquisitions
This point is by far Bary’s weakest argument of the eight points.
While it’s true that Buffett hasn’t made many acquisitions over the past eight years since buying Burlington Northern in 2010, it’s in part because of private equity that he hasn’t.
Private equity returns have been juiced by cheap interest rates over the past decade that hide the fact that many of these investment firms do little to improve the overall condition of the businesses they acquired.
However, because pension funds and other large investment vehicles have sought returns greater than the public markets, the prices these firms have been willing to pay have risen exponentially.
Berkshire Hathaway participating in auctions is a quick way to please impatient investors, but it’s a terrible solution to the company’s ever-growing cash hoard.
Disclose More Subsidiary Financials
As a society, we already live in a world where information overload is a serious problem.
Were Berkshire Hathaway to discuss every business in its stable, even just by providing the financials, the annual report would double or triple its current 148 pages.
I don’t know about you, but I have enough trouble going through 148 pages, do I need double that amount?
The whole point of investing in Berkshire Stock is because of its decentralized management structure.
Perhaps that’s something to look at after Buffett’s no longer a part of the business, but until then it too is overkill.
Name Abel as the Probable Successor
That’s Greg Abel, Chairman of Berkshire Hathaway Energy.
Yes, he does operate a business with a possible market value of $50 billion, but it’s a utility. It’s one thing to manage a regulated business worth that much and entirely another to run an unregulated business of equal value.
That’s not to say Abel wouldn’t be a great successor. It’s just that Buffett probably feels letting the cat out of the bag ahead of time does a disservice to all the other subsidiary CEOs doing an excellent job for the company.
The Bottom Line on Berkshire Stock
In May, I made the following case for breaking up Berkshire Hathaway:
“I think Berkshire Hathaway should create a second mini-Berkshire that would take about 70-80% of the cash along with the smaller operating businesses owned by Berkshire Hathaway, hire a CEO familiar to Buffett and Munger, and start building a mini version where smaller transactions would make more sense,
“The point is, with a smaller business to look at opportunities that aren’t big enough for Berkshire Hathaway, shareholders of both companies would win.”
That said, if Buffett continues to choose the status quo, I don’t think many shareholders would have a problem with that decision.
Better to go with the devil you know, than the devil you don’t.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
