Under The Spotlight: Berkshire Hathaway (BRK.A)

The history

Berkshire Hathway, Warren Buffet’s US$630b investment company was a textiles mill in its early days. The Hathaway Manufacturing Co. was formed in 1888 in Massachusetts before merging with Berkshire Fine Spinning Assoc. in 1955. Hathaway Manufacturing’s history spans back as far as 1839.

Then Mr Buffett came along and the story gets a lot more interesting.

In 1962, Buffett started accumulating the stock on his personal books. The trade ultimately worked against Buffett’s initial hypothesis. The business was failing and the company offered to buy Buffett’s shares at $11.50 each. He agreed…until the paperwork came in. The share buyback had offered $11.38c per share, angering Buffett to the point he flipped his stance and bought more stock. Once he had reached a controlling interest, he fired management and was left with a failing textiles company. An underhanded counteroffer was enough to accidentally create the 7th biggest US-listed company. Over the next 2 decades, Berkshire moved into the insurance space and the business really took off.

Buffett maintains Berkshire Hathaway was the worst trade he ever made. 

Now, let’s look at the company in the present day. There are countless facets to the BRK Empire but they can be split into 2 parts: the listed stock portfolio and the private equity business.

The stock portfolio

The BRK balance sheet holds over US$300b in listed stocks. Here are their 5 biggest holdings.

Their biggest holding is Apple and represents almost 40% of his total stock portfolio.

Let’s look into that trade a bit more deeply. Berkshire first bought Apple in May, 2016. A “modest” US$1.1b allocation at a US$430b valuation. Since then, the stock price has risen 600% as Apple became the worlds biggest company with a US$2.4t val. Over the last 5 years, Buffett has added US$36b to the position en route to a 5% ownership Stake in Apple. The Apple holding is notable for a few reasons. Not only is it BRK’s greatest trade ever (by dollars made), it’s an about-face on a longstanding BRK principle: avoid tech. 

For decades, Buffett avoided tech stocks. Sensibly, he insisted he didn’t understand them well enough to make an investment. It wasn’t until a 2011 investment in IBM that BRK made its first foray into the sector. Critics have pointed out that BRK missed out on the biggest market leaders of the 21st century. Of course, few are able to criticise the proven success of Buffett and Munger, backed by time-tested selection criteria.

Of course, Buffett is a value investor. Following in Benjamin Graham’s footsteps, he exclusively buys companies trading at a heavy discount to their fair value. Determining the intrinsic fair value is a process that differs from investor to investor. The metric is usually based on earnings per share, growth rate, and debt levels. It does not take into account the current price of the stock. 

Under those principles, here is how the BRK is allocated right now:

All examples of a “great business at a fair price” as Munger would put it.

Dividend king

Berkshire Hathaway (BRK.A) is on track to earn over US$3.8b in dividend income in 2021. 

While the Berkshire strategy is largely built on dividend income, they do not pay a dividend themselves. In Buffett’s eyes, excess capital is best allocated by reinvesting back into a business. The titan of investing’s commitment to improvement after decades is inspiring.

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Private interests

BRK does more than hold stocks in companies, it also runs them. Berkshire Hathaway owns 100% of dozens of subsidiaries across America. Well known names like GEICO (insurance), Duracell (batteries) and NetJets (private jets) all belong to the company. Their insurance businesses bring in US$61b a year, 24% of all revenue.

The future

Buffett is 90 and Munger just turned 97. The future of Berkshire Hathaway lies in the hands of someone a few generations junior to these titans of investing. At 59, Greg Abel is the man to take over as the next CEO of Berkshire Hathaway. Buffett announced the move in May during BRK’s AGM. 

Canadian born, Abel started his career as an accountant for an energy company. By the time he worked his way up to the president, Berkshire had acquired a majority stake in the company. There began a 22-year long journey and relationship with Warren Buffett. Acting as CEO of Berkshire Hathaway Energy before being promoted to vice president of BRK as a whole.

Where do you think the Berkshire Empire will go once it changes hands?