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Why Berkshire Hathaway Added Verizon and Wal-Mart to Its Portfolio

Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) has been steered for decades by one of the greatest investment managers ever, Warren Buffett. A couple of years ago, though, Buffett delegated some of the investment decision making at Berkshire to portfolio managers Todd Combs and Ted Weschler. Combs and Weschler are the ones who are most likely responsible for Berkshire's new investment in Verizon Communications (NYSE: VZ  ) , as it "only" amounts to over $500 million. Berkshire's addition to its Wal-Mart (NYSE: WMT  ) stake is most likely Buffet's own decision as the total position amounts in the billions.

Why the new Verizon stake?
Verizon recently acquired the remaining stake in Verizon Wireless from Vodaphone for $130 billion . The complete ownership of Verizon Wireless positions Verizon for the future as usage of mobile devices increases along with data demand.

According to research done by Cisco Systems, mobile data usage increased by a staggering 81% worldwide in 2013. Further, there were 7 billion mobile devices and connections on mobile networks in 2013, an increase from 6.5 billion in 2012. Smartphones-Verizon's "bread and butter"-were responsible for 77% of the growth in 2013 with over 400 million smartphones added to mobile networks.

In a survey conducted by Computerworld, Verizon captured the highest percentage of its users who were satisfied with their mobile network's coverage and availability. The coverage of Verizon's network is enjoyed by 77% of its users according to the survey.

Additionally, the survey revealed that 70% of Verizon's users are pleased with the reliability of their mobile connection to Verizon's network. The survey conveys that Verizon is the premium player in the mobile market with the high satisfaction among its users.

The strength of Verizon's mobile network and  its strategy for the future are what most likely appeal to Berkshire Hathaway.  .

Berkshire shopping for more Wal-Mart
After years of lagging behind, Wal-Mart is taking an aggressive posture and foraying wholeheartedly into e-commerce.

Wal-Mart's online sales now amount to $10 billion, which is a 30% increase from the last fiscal year. In its latest quarter, Wal-Mart increased its e-commerce business by twenty-seven percent compared to the year ago quarter. Further, Wal-Mart has generated returns on equity and capital over 20% and 13%, respectively, over the last seven years. On top of that, Wal-Mart perennially generates positive operating cash flow and free cash flow, and has increased its dividend every year for the last ten years.

WMT Cash from Operations (TTM) Chart

Attractive for a variety of reasons
Verizon and Wal-Mart fit well into the Berkshire portfolio for varying reasons.

Verizon represents the future of the telecommunications industry, and Wal-Mart's growing presence online will position itself for its own future. Wal-Mart also generates above average returns on equity and capital and spins off cash, making it extremely attractive to the value-conscious Berkshire Hathaway. Additionally, Verizon adds an element of growth to the Berkshire portfolio.

Given Buffett's and Berkshire Hathaway's success in the past, the added and new investment should benefit Berkshire shareholders going forward.

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Related Tickers

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: *****
VZ $44.90 Down -1.11 -2.41%
Verizon Communicat… CAPS Rating: ****
WMT $63.82 Down -0.91 -1.41%
Wal-Mart Stores CAPS Rating: ***