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Home / Business / Warren Buffett faces tough questions at the Berkshire Hathaway Annual Meeting

Warren Buffett faces tough questions at the Berkshire Hathaway Annual Meeting



More than 30,000 shareholders of
Berkshire Hathaway

She is expected to arrive at her annual meeting on May 4 in Omaha, Neb. There, the company will be celebrated and given insights from its leadership at one of the recent gatherings where CEO Warren Buffett and Vice President Charlie Munger could join. Buffett is 88 and Munger is 95.

However, the Berkshire owners (ticker: BRK.A) have not had much to cheer lately as the stock has outpaced the market this year. The company is still Depends on more than $ 110 billion, which may be a fruitless search for an "elephant size" intake.

The underperformance is likely to reflect other factors, including Buffett's age and succession concerns, the poor performance of Berkshire's $ 200 billion equity portfolio, and the current bias towards value-based equities.

Many investors may not know that the stock ̵

1; despite Buffett's reputation as a market maker – has been behind the S & P 500 Index for the last five, ten, and fifteen years, though it has crushed the index since Buffett's 1965. Berkshire has it now the sixth-largest value in the US stock market behind
Apple

(AAPL)
Amazon.com

(AMZN),
Microsoft

(MSFT)
alphabet

(, 99) and
Facebook

(FB).

A revised stock buyback program, which took effect last August, temporarily upset Wall Street, giving Buffett more leeway to buy back shares. But Berkshire buybacks were below $ 1.3 billion at the end of February, just 0.25% of the Berkshire market value of $ 520 billion. By contrast, many major banks buy back 5% or more of their shares annually.

"The biggest elephant Buffett could have taken in the last decade was the Omaha Zoo – his own supply," said Dave Rolfe, chief investment officer at Wedgewood Partners, St. Louis. "Imagine what the stock would have been like if Berkshire had been buying stock steadily over the last decade instead of raising all the cash." Berkshire did not buy any shares from 2013 to 2017.

Bill Smead, chief investment officer of Smead Capital Management, a Berkshire owner, says he wants at least $ 5 billion a quarter of repurchases. This would not affect Berkshire's cash position given its earning power.

A change in buybacks could be imminent. Buffett suggested to the Financial Times in a recent interview that the buybacks could accelerate and that the company could buy back $ 100 billion of stock, even though there was no time frame. The report helped boost Berkshire's stock late last week. Buffett told the Financial Times that he expects Berkshire's and the S & P 500's returns to be "very similar".

We are skeptical that Buffett really believes that. It's hard to accept that a competitive investor like Buffett believes that the company he spent over half a century building in can not beat the benchmark. (He did not respond to a request for comment.)

Berkshire's stock is still in terms of income, book value and outlook for the dozen of the conglomerate's companies, including the Burlington Northern Railroad, Geico (the country's number) attractive. 2) and Berkshire Hathaway Energy, a leading power utility.

With $ 318,000 to go, Berkshire recently scored 20 times 2019. While this is a premium over the S & P 500 multiple of 17, the gap has narrowed in recent years. Berkshire's earnings are undervalued to the extent that the company carries so much cash and only earns 2%. The profits only reflect the dividends received by the company from its equity portfolio.

"The stock is highly valued given the long-term growth opportunities in insurance, Burlington Northern and manufacturing, service and retail. There is also the opportunity to create value through significant acquisitions and share buybacks, "said Jay Gelb, Barclays analyst. He has an overweight and price target of $ 375,000 per share, according to Rolfe's estimated market valuation.

All returns except YTD are annualized.

Source: Bloomberg

Berkshire generates what Buffett has called "Niagara," a yield that should be $ 26 billion this year. It trades for a reasonable 1.4 times book value. While Buffett suppressed the book value as a financial measure in his last letter to shareholders because he does not take the full value of the company's many operating units, he remains an important benchmark and discreet substitute for Berkett's intrinsic value.

Given Berkshire's earning power, the book value could increase by nearly 10% per year in the coming years, assuming moderate gains in the equity portfolio. If the stock price is traceable over time, it could lead to similar price gains, not a record high.

Buffett encourages investors to focus on Berkshire's "look-through" results, which reflect net income rather than just Apple-owned dividends in Berkshire's equity portfolio.
American Express

(AXP)
Coke

(KO)
Bank of America

(BAC) and
Wells Fargo

(WFC). On a perusal basis, Berkshire reports a reasonable 16-fold in 2019, according to Gelb.

Buffett said he wanted to have a lot of cash, because he would prefer to pay cash for acquisitions, and wants financial firepower when the market refuels. This conservatism paid off during the financial crisis in 2008, when Berkshire made some attractive purchases, including Goldman Sachs convertible preference shares. He has suggested that Berkshire has $ 90 billion for a business.

Had Buffett not only an overwhelming reputation and his 17% stake in the firm, Berkshire could attract an activist who would urge the company to repay their cash check and distribute the money back to the owners in repurchases, The Buffett's favorite company is Apple. It is ironic that Buffett is thrilled with buybacks from leading companies in Berkshire's stock portfolio – Apple, American Express, Wells Fargo and Bank of America – but has been lukewarm in Berkshire for a long time.

Repurchasing shares is just one of several steps Buffett could take to help the owners and lay the foundations for the next generation of leaders in the business.

All returns annualized. * Two-year annualized return. ** Annualized return since the merger of Kraft Heinz on 29.07.15. NM = Not Meaningful

Source: Bloomberg

Barrons outlined some of these ideas last June in a cover story. Berkshire followed our advice on buybacks, but was cool for other suggestions.

Some repeat. Consider a dividend. Show the future leadership. Provide better financial reporting on Berkshire's many businesses. Offer insights from Berkshire stock managers Todd Combs and Ted Weschler, who are likely to take over the stock portfolio after Buffett. Hold an investor day to highlight Berkshire's top companies.

Buffett does not like the idea of ​​a dividend – and Berkshire has not paid any since the late 1960s. One is likely to be paid when he departs to lessen the burden on Buffett's successor in reinvesting Berkshire's revenues and to meet investors' expected demand for a payout.

Berkshire investors have long been happy to forego a dividend, as Buffett has achieved far better results than shareholders in reinvesting its profits in acquisitions and stocks. However, Buffett has created less value in recent years with low acquisition activity and mediocre investment performance. And since Berkshire had so much cash, why not start now with a modest return of 1% to 2%?

Berkshire elevated senior executives Greg Abel and Ajit Jain as deputy chairmen a year ago and gave Abel oversight of Berkshire's non-life insurance companies, which generate around 75% of revenue. Jain took responsibility for the insurance units. Barrons has been saying for several years that Abel, 56, is likely to succeed Buffett as CEO because of his experience as the operator of Berkshire's utilities and acquisitions. We believe Jain, an ingenious insurance company, is unlikely to get the first job given his age of 67 and his inadequate operational experience.

We suggested that the discreet Abel and Jain share the stage with Buffett and Munger at the annual meeting to engage them more in Berkshire's investor base. But Buffett did not really understand the CNBC idea in February.

* 1Q estimate E = estimate

Sources: Bloomberg; Company reports; Barclays

Smead of Smead Capital says it would be good to hear from Combs and Weschler, "We have no opportunity to read the Scriptures, hear public statements, or understand the logic of the two men Buffett has chosen other stocks than those who are stockbrokers who invest in value investing at an incredibly difficult time. "

Combs and Weschler each carry shares worth around 13 billion US dollars and are independent of Buffett. When asked what they had done at CNBC two months ago, Buffett said they were a little behind the S & P 500 index during their term of office about eight years ago. They started well, but their performance has waned in recent years.

Combs and Weschler are believed to hold some of Berkshire's smaller equity positions, such as:
Charter Communications

(CHTR)
General Motors

(GM),
DaVita

(DVA) and
Visa

(V) in their portfolios. Buffett told CNBC that Combs and Weschler "have done better than me."

Buffett's portfolio includes long-term laggards such as Wells Fargo and Coca-Cola (the stock has barely changed in 20 years).
Power Heinz

(KHC) is a catastrophe that has fallen 40% last year and is melting almost all of Berkshire's profits from the investment, and it will go back to buying up Heinz by 2013.

Apple is a big winner at $ 52 billion, Berkshire's largest stake, but otherwise Buffett has missed out on the strongest sectors of the market: tech and healthcare.

Berkshire was to hold an investor day to inform investors about its top dozen deals. Buffett does not say much about them in his annual letter, and Berkshire reports only for the biggest financial results. Berkshire was to provide both revenue and profits for the dozen, including Precision Castparts, which Berkshire acquired in 2016 for $ 32 billion. This was the biggest Berkshire deal this decade.

Due to limited financial information, Precision Castparts looks like a disappointment. Last year's $ 10 billion in revenue has barely changed since 2015 due to uneven earnings. Buffett likes to say that Berkshire investors are his partners. Do not you deserve a billing for Precision?

What could Berkshire buy next? There is always speculation about it. Recent attention focused on an airline including
Southwest Airlines

(LUV) or
Delta Airlines

(DAL) given Buffett's affinity for the sector and the low valuations of companies relative to profit. Berkshire already owns 10% of both. An obstacle could be that airline boards can charge more than what Buffett is willing to pay.

An indication of what Buffett's next deal might be in Berkshire. Berkshire's last two major transactions – Burlington Northern and Precision Castparts – had been Berkshire Holdings prior to the deals. Another option is Aflac (AFL), the insurer controlled by the Amos family.

Buffett, however, poses a major handicap himself by refusing to attend corporate auctions. This makes it difficult for company boards of potential sellers to accept a bid from Berkshire without buying the company. Private equity companies are not limited, and companies like
Blackstone Group

(BX) was not disabled.

However, the outlook for big business does not look promising, according to Buffett's own admission, "because prices are high for companies with respectable long-term prospects in the sky," he wrote in his annual letter. Buffett suggested CNBC consider a deal in the fourth quarter.

After Buffett as CEO, activists might show up in Berkshire because it's such a mature destination. Berkshire is a wealthy conglomerate that sells below the value of its parts. It's a rarity at a time when companies like
United Technologies

(UTX) and
Novartis

(NVS) break up to form more focused companies that are favored by many major investors. Without Buffett, it may be difficult for the Berkshire Board to resist the pressures of the activists.

Buffett may have anticipated this scenario when he said at the 2017 Annual Meeting that Berkshire's stock would rise on the day after his death – contrary to popular belief – due to speculation about liquidation.

His view is that Berkshire is better together. "The whole thing is bigger – much larger than the sum of the parts," he wrote in the annual letter. A major Berkshire added, "Allow us to seamlessly and objectively allocate larger amounts of capital." Investors see the benefits of Buffett at the helm, but they may not have the same confidence in his successor.

Lots of value in Berkshire, which could one day be unlocked. Burlington Northern could have a value of $ 125 billion, equal to the value of its nearest rival.
Union Pacific

(UNP). Berkshire utilities are likely to be worth $ 50 billion, or about 20 times the profit, and Geico could also be worth $ 50 billion, a premium to his smaller rival
Progressive

(PGR).

Berkshire is the ultimate defensive stock due to its balance sheet and earning power and earns a place in many portfolios.

The stock looks reasonably favorable and could trade higher when catalysts occur, such as a more aggressive buyback program or an important deal. The Buffett Premium has disappeared from the stock. In the post-buffett era, there is a risk that it can not be replaced. Investors could then benefit from buybacks, dividends and a potential breakup of a large company that does not have to be close to its current size.

Write to Andrew Bary at andrew.bary@barrons.com


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