Buffett Likes This Tech Stock

Warren Buffett has repeatedly made it very clear that he has no interest in investing in the technology companies, considering that they fall outside of his "circle of competence." So it may come as a surprise to many that Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) disclosed a new $200 million position in a technology stock in a filing Monday. Is Buffett straying from his area of expertise or is there more to the investment than meets the eye?

The stock in question is Fiserv (Nasdaq: FISV  ) , one of the largest providers of electronic commerce solutions to financial institutions. It is a dominant player in a tech subsector -- financial technology -- that has an attractive quality compared to many other areas in technology: It's possible for firms to build an entrenched competitive position.

It's all about inertia
Consider the inertia that prevents you from switching from Microsoft Office to competing products, even free ones such as Google Docs or Oracle's OpenOffice. Now consider a financial institution that runs software to fulfill critical tasks such as transaction processing or fund transfers. Its software is connected to multiple other applications and is already deeply embedded across different areas of the organization. Now we're talking about the sort of inertia that is sufficient to slow the rotation of the earth, let alone the actions of an IT purchasing manager.

For a financial institution, there are enormous costs and risks associated with replacing one software vendor with another; once a provider's system is installed, competitors face a steep uphill battle trying to dislodge the incumbent. That is precisely the type of unassailable position Buffett looks for in the businesses he wants to own.

That's not all. Fiserv derives 80% of its revenues from account and transaction processing fees -- recurring revenues from long-term contracts. It's a classic example of the tollkeeper model, which is wonderfully stable. No wonder Buffett likes this stock. (Motley Fool Inside Value advisor Joe Magyer likes it, too; he selected it as his 11 O'Clock Stock last month.)

Rebuilding a core position
Yesterday's filing revealed one other significant action: The 73% increase in Berkshire Hathaway's Johnson & Johnson (NYSE: JNJ  ) stake. In 2008, Buffett reduced his positions in Johnson & Johnson and Procter & Gamble (NYSE: PG  ) to fund the purchase of high-yielding, multibillion-dollar investments in General Electric (NYSE: GE  ) and Goldman Sachs (NYSE: GS  ) .

This re-up represents a vote of confidence in a health-care blue chip at a time when the segment has fallen out of favor. Given Buffett's concerns about the long-term risk of inflation, adding to a position in a "franchise" stock that yields 3.7% does Berkshire's portfolio no harm at all.

With the recovery stalling and the economy on the brink of deflation, a sustainable dividend will become increasingly valuable. Jordan DiPietro has identified the best dividend stock. Period.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Berkshire Hathaway is a Motley Fool Inside Value pick. Berkshire Hathaway is a Motley Fool Stock Advisor choice. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor picks. The Fool owns shares of and has written covered calls on Procter & Gamble. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (69)

Comments from our Foolish Readers

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  • Report this Comment On August 18, 2010, at 4:19 PM, plange01 wrote:

    buffetts company is # 17 on the top 25 companys for layoffs with 17,000! a real success he doesn't want you to hear about! may want to hire a few more body guards!

  • Report this Comment On August 18, 2010, at 4:40 PM, TMFAleph1 wrote:

    @plange01,

    Thanks for your comment, but that figure isn't scaled to the total number of employees, so it's pretty well meaningless.

    What you don't mention is that Berkshire Hathaway is the 28th largest employer in the U.S. with 222,000 employees. That's a much more productive way of looking at things.

    Alex D

  • Report this Comment On August 18, 2010, at 8:30 PM, glake1 wrote:

    What happens to Fiserv if and when small banks get to the place wher they are unable to operate profitably because of regulation requirements and costs?

  • Report this Comment On August 18, 2010, at 9:08 PM, tomd728 wrote:

    I, for one, am really tired of hearing what Warren Buffett thinks, does or does not do.

    In no way would I or could I lessen his place in the

    history of finance and the markets but the man is looked at with such reverence it is sickening.

    BRK is not a "one man band" but it would appear so by reading the endless patronage.

    Tom

  • Report this Comment On August 19, 2010, at 5:33 AM, wax wrote:

    What I have found so odd of late, is that Fooldom is fast becoming the Warren Buffett site.

    Certainly Mr. Buffett is a notable investor, but it's as if all Fooldom can do is headline that Mr. Buffett tied his shoe or combed his hair so the rest of us should do it too.

    Just like this article. I don't believe that BRK bought FISV.

    Why would they, since more than 76% of the company's assets are made of Goodwill and Intangibles, which, when you back those out, means the stock is trading at a negative tangible book value.

    Yet because it is one Fooldom's 11 o'clock stocks, miracle of miracle, it's the best thing since free cheese, and not only that, Warren Buffett owns it.

    Gosh Wally, you think we should get some too?

    Come on guys, original thinking is why Fooldom has survived as long as it has. Can we please see a more of that and less newsletter marketing?

    Wax

  • Report this Comment On August 19, 2010, at 5:49 AM, TMFAleph1 wrote:

    @Wax,

    You may not believe that Berkshire Hathaway owns Fiserv shares, but it is a fact -- you can verify it on Berkshire's form 13F:

    http://www.sec.gov/Archives/edgar/data/1067983/0000950123100...

    On your broader comment: I can understand that people will at times get tired of the amount of Buffett coverage on the Fool website. The counterpoint to that is the he is arguably the greatest investor of all time; therefore, any investor who wants to improve should be willing to devote significant time and effort to understanding how he thinks about stocks. Eddie Lampert, for example, spent time trying to reverse engineer Buffett's early investment decisions.

    Best,

    Alex D

  • Report this Comment On August 19, 2010, at 8:16 AM, sept2749 wrote:

    When you referred to tthe franchise stock that yields 3.7% you were referring to JNJ -right? Their yield seems to be 3.1%. Why do I often find these types of errors in these articles. It seems to occur with no specfic author but more frequently then I'd like to see. I for one need to be able to count on your info. and not have to double check. Thank you for the general info. it's good stuff!

  • Report this Comment On August 19, 2010, at 8:53 AM, money4eds wrote:

    To become as master you study. Why not look at other investors? If you can outperform Buffett and company I would expect Fool to share your moves.

  • Report this Comment On August 19, 2010, at 9:00 AM, cybdiver wrote:

    Big deal, sometimes he buys a stock because he wants to watch the company move or it gives him a say on the board.

    This is a stock with a limited ability and a targeted audience. Ma and Pa kettle will not be buying into this unless it's part of their 401 portfolio.

    The rest of the portfolio is in a box under the bed.

  • Report this Comment On August 19, 2010, at 12:09 PM, TMFAleph1 wrote:

    @cbdiver,

    Thanks for your comment.

    A $200 million stake doesn't give Buffett "a say on the Board" of Fiserv. The only thing that gives anyone a say on the Board of any company is a Board seat.

    Large shareholders can always open a dialogue with a company's Board of Directors, but they do not participate directly in Board decisions unless they are members of that Board.

    Alex Dumortier

  • Report this Comment On August 23, 2010, at 12:54 PM, SweetMircha wrote:

    In my understanding of Buffett's desire to buy into companies that pay dividends that are sustained and grow over many years, then why would he have bought into FISERV when it's NOT a Dividend payer at all?

    There must be alternative motives to his investing into this company stock. Maybe he has inside info that it'll be bought out by one of his great dividend paying companies.

    Mary

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