Not only was this year’s meeting different because it was done virtually — without an audience in the auditorium — but also because Vice Chairman Charlie Munger wasn’t answering questions. Instead, Greg Abel, who’s in charge of the company’s non-insurance operations, stepped up to the plate.
Buffett and Abel had plenty to say about the company despite the lack of audience. As always, the exercise was an excellent way to communicate all the great things that are happening at Berkshire Hathaway.
However, given the novel coronavirus, the meeting had more of a serious tone.
Not bad, just different.
I’m sure all Berkshire Hathaway shareholders are hoping for a return to the regular, in-person gathering that’s become finance industry lore.
In the meantime, here are seven things we learned from Warren Buffett at this year’s meeting.
Warren Buffett Still Has a Lot of Energy
It’s hard to believe that a man who will turn 90 in August was able to spend 4.5 hours on stage answering questions about the company, the economy and the American way of life.
If you read the comments on Yahoo Finance, I think you’ll come away convinced Buffett said very little in almost five hours on stage. That would be missing the point.
The goal of every person in America should be to get on stage nearing the age of 90 and string sentences together on many different subjects in front of a camera. It’s not an easy task. Warren Buffett is a shining example of what we humans are capable of if we’ll just get out of our own way.
“The single biggest takeaway from the meeting for me was, we just watched an 89-year-old man go for four and a half hours. And I don’t know about you guys, but I’m exhausted just trying to follow four and a half hours and pay attention,” former hedge fund manager Whitney Tilson told Yahoo Finance.
Berkshire Hathaway shareholders ought to thank their lucky stars Buffett is leading the company. When he’s gone, virtual meeting or not, it’s not going to be the same. He’s the Bruce Springsteen of capitalism — and I love that about him.
Warren Buffett Isn’t Buying Airline Stocks
Fool me once, shame on you. Fool me twice, shame on me.
I recently discussed why Warren Buffett dumped all four of Berkshire’s airline stocks. During the annual meeting, Buffett got into some of the reasons.
“The world has changed for the airlines, and I don’t know how it’s changed, and I hope it corrects itself in a reasonably prompt way. I don’t know whether Americans have now changed their habits or will change their habits because of an extended period that we’re semi shut down in the economy,” Buffett stated while answering a question.
He explained the company’s rationale for buying 10% of the nation’s four largest airlines had to do with the fact Berkshire was getting approximately $1 billion in annual earnings from the companies. That number was likely to go up over time.
What he didn’t say is that up until 2016, Buffett wanted nothing to do with airlines.
“In 1989, Buffett bought $358 million in convertible preferred US Air stock. Those preferred shares paid 9.25% interest, convertible into common stock at $60 a share. The investment was good for 12% of the company. The shares never reached $60 and he wrote down his investment at the earliest point possible,” I recently wrote.
While there’s no way anyone could have predicted the devastation Covid-19 is causing the airline industry, Buffett’s history demonstrates they are generally nothing but an expensive hobby.
Even if Buffett lives to 120, I find it hard to believe he’d take Berkshire for a third walk down the aisle.
Markets Look Ready for Another Correction
Unlike in the Great Recession, Warren Buffett seems a lot less confident about the general direction of the economy and stocks.
“I don’t know, and perhaps with a bias, I don’t believe anybody knows what the market is going to do tomorrow, next week, next month, next year,” Buffett said May 2. “You can bet on America but you have to be careful about how you bet. Simply because markets can do anything … Nobody knows what’s going to happen tomorrow.”
The San Francisco Federal Reserve recently released a study that looked at the past 15 major pandemics — defined as 100,000 deaths or more — and found that returns on assets went down after the fact.
If you consider that Berkshire’s cash pile had grown to $137.3 billion at the end of March, up from $128 billion at the end of December, it’s clear that the company isn’t doing much investing. That’s despite the 12% year-to-date total loss for the S&P 500.
Buffett just doesn’t see many good deals on stocks — and that’s primarily a function of the uncertainty brought by Covid-19.
Share Repurchases Remain Buffett’s Friend
Interestingly, Buffett didn’t repurchase shares in March, when they were 30% cheaper than in January and February. Morningstar analyst Gregg Warren was disappointed by that choice.
“While we can certainly understand the need to be cautious with investments and acquisitions in the near term … the company has a good investment opportunity in its own common stock and management should really be called out for failing to take more aggressive action during the first quarter,” Warren stated.
Buffett continues to argue share repurchases are no different than dividends. Greg Abel did point out that many companies who buy back stock fail to consider the downside of utilizing 100% of their free cash flow for share repurchases.
“Effectively you’re using every ounce of your balance sheet to buy back stock at a time where you’re really creating no cushion for your business for any type of event or bump in the road,” Abel stated.
Has Buffett been overly cautious so far in 2020? Probably. But given no one knows what the coronavirus is going to do next, discretion is the better part of valor.
Berkshire Hathaway’s Businesses Are Doing Just Fine
One of the questions during the shareholders meeting was whether the company would send money to operating subsidiaries that might be tight on cash during the coronavirus. From Buffett:
“We’ve sent money to a few and we’re in a position to do that. We’re not going to send money indefinitely. It’s changed dramatically from what it was the year or so ago or just even six months ago. You know, we made that decision in terms of the airline business. We took money out of the business basically even at a substantial loss, and we will not fund a company where we think that it’s going to chew up money in the future.”
Greg Abel suggested that many of Berkshire’s non-insurance companies have done an excellent job of reacting to the situation and adjusting their businesses. As a result, very few have required more operating capital.
As they say about bankers, they’re sure to lend you an umbrella when it’s sunny outside. The same applies to Berkshire. While it has a “Fort Knox” balance sheet, it prefers its operating companies to stand on their own two feet.
That’s the beauty of a decentralized conglomerate that knows how to allocate capital. It allocates that capital judiciously.
Berkshire Hathaway Continues to Grow Its Employee Count
A long time ago, I recommended a bunch of stocks based on company hiring. To me, a growing employee base is one of the best signs of a healthy company.
Berkshire finished fiscal 2019 with 391,539 employees on the payroll, both at head office and its insurance and non-insurance operations. According to Statista, the company had 340,500 employees in 2014, a five-year compound annual growth rate of 2.8%.
According to Yahoo Finance, Berkshire Hathaway has eight operating companies with more than 20,000 employees: Geico, BNSF, Precision Castparts, Fruit of the Loom, McLane Company, Berkshire Hathaway Energy, Marmon and Shaw Industries.
These eight companies accounted for 61% of Berkshire’s total employees.
During the annual meeting, shareholders wanted to know about particularly hard-hit businesses. Buffett admitted that its businesses in several industries would take a hit. I would guess retail would be at the top of that list. However, he did say the reduction in headcounts wouldn’t be significant.
So, even though the number of employees over the past five years increased by just 2.8% annually, many companies have significantly cut their headcounts. Slow and steady wins the race.
The Oil Industry Is Almost as Bad a Bet as the Airlines
What would you say if I offered you the chance to buy 100,000 cumulative perpetual preferred shares that pay an annual dividend of 8% and provide warrants to buy 80 million shares of common stock at an exercise price of $62.50 a share?
You’d want to know what the current price of those shares was.
Well, Berkshire Hathaway did precisely that, investing $10 billion in Occidental Petroleum (NYSE:OXY) in May 2019. This cash helped Occidental complete its acquisition of Anadarko Petroleum. At the start of the deal, OXY shares were trading around $58. By the time the investment closed on Aug. 8, shares had fallen to $51.
At the time, it seemed like a good deal. A year later, not so much. Occidental shares are down to $15 due to a collapse in oil prices.
At the annual meeting, shareholders asked if the Occidental Deal permanently hurt Warren Buffett’s reputation.
“… When you buy oil, you’re betting on oil prices over time, there’s risk and the risk is being realized by oil producers as we speak. If these prices prevail, there will be a lot of bad energy loans and bad debts. And if there are bad debts and energy loans, you can imagine what happens to the equity holders. So yes, there’s a risk,” Buffett said.
The good thing about Berkshire’s investment is that assuming Occidental remains a viable business, the company will continue to receive its 8% annual dividend. That’s $800 million every year until the price of oil recovers.
But it’s got to recover — and that’s not a sure thing.
Of the two bad investments Berkshire’s made, I’d say Occidental was much worse than the airlines. Nobody could see the coronavirus coming in 2016.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.