3 Factors to Consider Before Buying Berkshire Hathaway

In this segment from Tuesday's Investor Beat, host Chris Hill and Motley Fool analyst Mike Olsen look at three criticisms that have recently been levied against Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , ahead of its upcoming earnings report. The first is that the stock has become too big to invest in, the second is that the company will someday be Buffettless, and the third is that with Buffett himself having come out and said that he will never buy back shares of the company for any more than 1.2 times book value; with shares currently trading at 1.4 times book, why should investors buy when even Buffett himself considers 1.4 to be too expensive?

As a shareholder himself, Mike looks at these three ideas and discusses why he disagrees that each would be a cause for concern.

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  • Report this Comment On February 26, 2014, at 8:55 AM, magneto1 wrote:

    Wow, this article has completely mangled Buffett's words. In September of 2011, Buffett decided to authorize share repurchases at up to 110% of book value because he saw more intrinsic value per share added by share repurchases than by letting the cash sit idle. In December of 2012, in a private transaction, he upped this value to 120%. If he were so inclined, he could increase that value to 130%.

    It is true that one day the company will be without him, but the principles of the company will remain intact (if you recall, Apple stock didn't tank after Steve Jobs passed away). Berkshire is a conglomerate of over 50 subsidiaries, plus it owns stock in another 50 companies. The portfolio of stocks is valued at about $104 billion, and the share appreciation of that portfolio is counted in book value, but not in earnings. The stock portfolio generates dividends, as well as appreciation (with the main downside being double taxation).

    So we've got a company with a market cap of $281 billion, $104b in stocks, and $171b in other assets. Well those other assets generate about $17 billion in cash flow, which is a 10% return on investment. They take that $17 billion and use it to buy stocks, or buy preferred stock, make acquisitions, or do the occasional share buyback. That money is still going to be coming in long after Buffett is gone, and it just needs to be deployed intelligently (or handed out as a dividend, but that seems unlikely).

    Another thing to note is how Berkshire pays the presidents of each of its subsidiaries. They are compensated well, but Berkshire does not dilute shareholder equity by giving out stock options.

    I would not expect any stellar moves in this stock because of its size. It is now more of an investment for "widows and orphans", and I think it's safe to expect returns in the 8-14% range going forward.

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Chris Hill

Full-time host of the Motley Fool Money radio show, MarketFoolery podcast, and other things. Part-time connoisseur of movies, basketball & fine bourbon.

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9/1/2015 4:00 PM
BRK-A $198144.30 Down -4386.70 -2.17%
Berkshire Hathaway… CAPS Rating: ****
BRK-B $130.41 Down -3.63 -2.71%
Berkshire Hathaway CAPS Rating: *****