Berkshire Hathaway

[Brat]

I purchased some B shares early this year and it has performed very well. Reading gossip online I see that some are commenting that it has too much cash and nothing to spend it on (not that they would telegraph if they had a target) and that they might start paying dividends.

What do our ER wizards of wall street think?

 

[braumeister]

Knowing Warren, I would bet on share buybacks before dividends.

 

[Brat]

So, given that possibility should I buy more now?

 

[Woodsrider]

I remember reading in the annual report what the conditions must be before they will buy shares back. I don't remember what those conditions were but that should be easy to find.

 

[ziggy29]

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Knowing Warren, I would bet on share buybacks before dividends.

Buffett has long been on record as saying he would always retain all earnings until he could no longer meet his own tests for return on said earnings invested internally rather than what shareholders could achieve with a dividend, even more so when taxes are factored in. As long as he believes he can grow intrinsic value more than "the market" could return, he'll retain dividends. (Keep in mind that this is in "Berkshire time" -- over a period of years or even decades, not the next quarter or the next year.)

He would certainly lean toward a share buyback over dividends as long as BRK stock was reasonably valued. About the only scenario that would cause BRK to pay dividends is one that would scare me out of equities in general, perhaps -- where he can't find any good investments out there and BRK is very overvalued to the point that he wouldn't repurchase shares with the mountain of cash they are holding.

 

[braumeister]

so, given that possibility should i buy more now?

imho:

 

[Totoro]

Buffett would only buyback his own shares if he thinks they are undervalued - he stated this explicitly, putting a floor under the share price at I believe 1x book value (maybe it was even 1.3, don't know). Also, he's comfy with up to 30% cash drag.

And last but not least: yes, he would consider paying dividends if he couldn't find better use for it.

I sold my berkshire B shares the other week after a nice runup.

 

[OldShooter]

So, given that possibility should I buy more now?

Do you think your insight is something that has not occurred to professional traders and is thus not fully reflected in the stock price?

 

[Totoro]

Or put differently: no.

The returns from Berkshire come from the returns of their businesses. How this is given back to their shareholders is irrelevant.

In practice there are some differences since some funds only invest in dividend payers etc .. but in any case it is not actionable.

 

[Running_Man]

Do you think your insight is something that has not occurred to professional traders and is thus not fully reflected in the stock price?

The stock price of BRKA has basically been tracking the S&P500 exactly since the market bottom in 2002-2003 and passive investing has become more and more the norm, as a huge conglomerate it is in lockstep with the S&P500 and most shares are bought and sold as a result of passive index investing. There are some short term variations but the long term is basically a match to the S&P500 from 2002 at about a 236% gain

 

[Totoro]

Is this correct? I have a 101% S&P500 gain vs. 286% Berkshire since june 2001.

 

[Running_Man]

Is this correct? I have a 101% S&P500 gain vs. 286% Berkshire since june 2001.

During the 2000-2002 market decline Berkshire vastly outperformed the S&P500 - From January 2000 to the bottom of the market in July 23,2002 Berkshire returned +15 percent while the S&P 500 lost 40 percent. Since then --- this includes dividends reinvested---their performance is extraordinarily highly correlated and virtually the same return over these past 15 years. My belief it is a combination of how big Berkshire has become as a conglomerate entity and the influence of passive investing.

 

[Totoro]

Ah, ok, makes sense now. Last ten years was 108% vs. 75%, but I think the 75% (S&P) is without dividends, so that's near the same indeed.

I also expect that the major outperformance is a thing of the past (which he also admitted), but that it is bit more robust in downturns (lower downward volatility). Who knows.

 

[OldShooter]

Is this correct? I have a 101% S&P500 gain vs. 286% Berkshire since june 2001.

He hasn't outperformed his own benchmark in six or seven years. He's still the leader in self-promotion, however, a title he may hold forever. "The oracle of Omaha." PR firms would kill for that.

 

[seabourne]

For reference, the current buyback limit is at 1.2 Book Value (hasn't been moved in a couple of years). It's also worth looking at the price of BRK versus the Book Value growth over the time period that you're comparing it to the SP500. While the prices have tracked, BRK doesn't look like the price is getting ahead of the value nearly as much as SP500, and so has probably become relatively less expensive by comparison.

 

[free2020]

For reference, the current buyback limit is at 1.2 Book Value (hasn't been moved in a couple of years). It's also worth looking at the price of BRK versus the Book Value growth over the time period that you're comparing it to the SP500. While the prices have tracked, BRK doesn't look like the price is getting ahead of the value nearly as much as SP500, and so has probably become relatively less expensive by comparison.

Agree with this. In fact, Buffett has been nudging us to do this, look at Mkt value . This is because the company has morphed from one owning securities to owing businesses outright and BV is not marked to market. Besides there is the very large insurance float which is leverage in itself. IV increasingly diverges from the BV. Buffett has been signaling this for the past 5 or so years. To value Berkshire in today's context, keep an eye on owner earnings. That is where management is focused on as well. They are replacing liquid assets into illiquid ones. Ex. Duracell, Phillips etc. to increase earnings.

 

[YVRRocketSurgery]

Just wanted to link a kind of an interesting short article from 2016 titled "How To Beat 98% of All Mutual Funds".

The simple answer is you would buy Buffet's top 10 stock picks and rebalance each quarter. Point to note, as Running_Man mentioned above, Buffet way outperformed the markets in the early 2000's.
However, the overarching commentary is, regardless of all the investment styles out there (value, momentum, trend, buy & hold, etc) that Buffett is successful because he sticks to his investment style and doesn't flip flop and sell at the worst time. With consideration that Buffet's top 10 stocks have trailed the US market 7 out of the last 9 years, would that be enough to shake your conviction and start flip flopping strategies?

 

[220volt]

My biggest fear of going in Berkshire is Buffett's age. He is 88. I know that many are predicting successful continuation after he's gone but just look at the successful funds throughout the history. It was almost always single manager's mind and vision and not the team. The team helped of course, but ultimately it is the Buffet, Lynch, Templeton, Graham who make final decisions. It's their baby. And after their departure, some of those funds did not do very well.

 

[Brat]

I share your concern.

 

[Totoro]

The stock could go very volatile should buffet depart. Unless he steps down before that, gradually.

He's been handing off some investments(sub 1 billion?) already to Ted and Tod.

 

[athena53]

I was reluctant to buy BRK years ago because of concerns over Warren's age. My advisor (yes, there's a reason I keep one!) said that once when there was a rumor that he was nearing the end the stock price dropped by either 5 or 10%, I forget which. It's up over 100% from when I bought it. Can't get the history easily because it's since been transferred from another brokerage but I think I bought the first shares about 15 years ago.

I can handle a 10% drop and I'd guess that some of the uncertainty over Buffet's longevity is baked into the price already.

 

[Sunset]

I suspect the stock will go up when Warren dies, as he has refused to pay dividends (although he says he likes getting them). I think the new person could easily start a 2.5% dividend and the stock would increase in value due to demand from income seeking investors.

 

[GrayHare]

I suspect the stock will go up when Warren dies, as he has refused to pay dividends (although he says he likes getting them). I think the new person could easily start a 2.5% dividend and the stock would increase in value due to demand from income seeking investors.

BRK is one of few cap-gain-focused, zero-dividend equity investments available. Many people hold BRK for that tax-efficient approach. I would sell my holdings if BRK started paying divs.

 

[Sunset]

BRK is one of few cap-gain-focused, zero-dividend equity investments available. Many people hold BRK for that tax-efficient approach. I would sell my holdings if BRK started paying divs.

I have also appreciated that aspect as well, in many ways it's better than a non-deductible IRA (no limit on contribution, tax free growth, and even better is low taxes on cashing out LTCG).

Still there are lots of people who see the inconsistency in Warren's view on dividends and lots of people who view dividends as a (+) so it would push up the stock.

 

[bobandsherry]

I get why Warren is well respected businessman. However, I've watch Berkshire and seen that has consistently under performed JPM which is one of my major holdings. Looking at value of $10,000 invested over the years:

10 year return, BRK.A $21,584 (8.0% annual return) vs JPM $32,950 (12.67% annual return).

5 year return BRK.A $20,115 (15.03%) vs. JPM $27,380 (22.36%).

1 year return BRK.A $11,822 (18.39%) vs. JPM $12,968 (29.97%).

So I guess this indicates Warren is a good business man but he hasn't generated the best return for shareholders. Based on relative performance Dimon does a better job especially for his shareholders and even more interesting given the challenges that financial service business has had to overcome in the past 10 years.