Some investors will overlook Berkshire Hathaway (BRK-a and BRK-b) as a potential high quality investment because they strictly adhere to rigid dividend related criteria.
A great many investors focus exclusively on investing in companies that have a dividend yield of X% or greater.
Other investors refrain from investing in companies unless they have a certain number of consecutive years in which the dividend has been increased.
I, however, have no such restrictions when it comes to investing. My interest is to invest for the long-term in high quality shareholder friendly companies….regardless of the company’s dividend policy!
If I had placed restrictions on myself such as those mentioned above, I would have never invested in great companies such as Visa (V), Mastercard (MA), Brookfield Asset Management (BAM), and the subject of this brief article, Berkshire Hathaway (BRK-a and BRK-b).
In my most recent BRK post, I indicated BRK-b shares are held in the FFJ Portfolio and that I would be acquiring additional shares. In keeping with this disclosure I acquired additional shares for the FFJ Portfolio’s ‘Core’ and ‘Side’ accounts on January 8th; shares were acquired in two different accounts at an average purchase price of ~$196.
Fast forward to February 22nd and various business media outlets have reported that BRK was expected to report weak FY2018 results because of significant problems at one of the companies in which it holds a significant interest (Kraft Heinz Co (KHC)).
In addition to problems at KHC, the pullback in the equity markets was expected to weigh on BRK’s FY2018 bottom line as a new GAAP rule requires BRK to report any loss from a reduction in the amount of unrealized capital gains in its investment holdings; I encourage you to read Warren Buffett’s February 23, 2019 Letter to Shareholders. At the very beginning of this letter he explains why this requirement is not sensible.
Turning to BRK’s KHC investment, BRK initiated a position in Kraft Foods Inc. in the quarter ending December 31, 2007. Subsequent to that initial investment, Kraft Foods Inc. has morphed into KHC and BRK has increased its ownership interest to the point where it is the 6th largest equity holding as per the most recent Form 13F for the quarter ending December 31, 2018.
In this most recent Form 13F, BRK discloses that it holds 325,634,818 KHC shares. Naturally, with KHC’s February 22nd disclosure of a $15B write-down on its marquee brands, it was highly likely that BRK’s shares would feel the impact.
As if the KHC’s write-down wasn’t enough bad news but the company also announced a 36% cut in its quarterly dividend and it disclosed that the U.S. Securities and Exchange Commission was investigating its accounting policies!
So, with KHC’s share price dropping ~27.50% ($13.23) from the February 21st close it has come as no surprise that the media would be all over the ~$4.3B decline in BRK’s KHC interest; keep in mind that BRK has a ~$496B market cap as at the close of business on February 22, 2019!
With all this negative news swirling around and the pullback in BRK’s share price I reflected on the following Buffett ‘pearls of wisdom’:
‘You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.’
‘Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.’
With the above in mind, I initiated a BRK-b position the afternoon of February 22nd in one of our undisclosed accounts; we now hold shares in 4 different accounts.
When I wrote my recent ‘A Great Investment Portfolio Example of Diversification’ article, BRK was our 18th largest holding; United Technologies (UTX) was our 17th largest holding. Following my February 22nd BRK purchase, BRK has vaulted past UTX and is now our 17th largest holding.
I recognize many investors may be hesitant to invest in BRK given Buffett’s and Munger’s advanced ages (88 and 95 respectively). While their eventual passing will certainly be a great loss, Buffett and Munger have indicated on numerous occasions that they have the right people in place to allow BRK to continue to thrive. In fact, in the February 23rd Letter to Shareholders, Buffett states:
‘Before moving on, I want to give you some good news –really good news – that is not reflected in our financial statements. It concerns the management changes we made in early 2018, when Ajit Jain was put in charge of all insurance activities and Greg Abel was given authority over all other operations. These moves were overdue. Berkshire is now far better managed than when I alone was supervising operations. Ajit and Greg have rare talents, and Berkshire blood flows through their veins.’
I highly encourage you to read Buffett’s easy to digest annual Letter to Shareholders. In this most recent letter, he continues his long standing practice of delivering profound advice about investing, business, and life.
If his message appeals to you then move on to the 2018 Annual Report. When you dig into BRK, keep in mind the holdings reflected in the Form 13F are just one aspect of BRK. As a BRK shareholder, you also benefit from BRK’s extensive list of operating companies (page 135 of 140 of the 2018 Annual Report) which employ in excess of 389,000 people, of which only 26 are employed at BRK’s Corporate office!
Regrettably, the 2018 Annual Report does not list BRK’s automobile dealerships and real estate brokerage businesses. I, therefore, encourage you to review BRK’s 2017 Annual Report wherein these businesses are listed.
On a final note, if you adhere to restrictions such as those mentioned at the beginning of this article which precludes you from investing in BRK, then you are missing out on a great long-term investment opportunity.
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long BRK, BAM, MA, UTX, and V.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.