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Will Berkshire Hathaway Help You Retire Rich?

Dan Caplinger
September 19, 2012

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Few investments inspire the kind of loyalty you'll find from shareholders of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . From the adulation of all things Warren Buffett to the tens of thousands of investors who flock to Omaha in pilgrimage for the company's annual shareholder meeting, Berkshire is part investing club, part social club, and part megalithic industrial conglomerate. But, despite all the hype, is the stock a smart investment right now? Below, we'll revisit how Berkshire Hathaway does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Berkshire Hathaway.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $220 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 3 years Fail
Stock stability Beta < 0.9 0.49 Pass
  Worst loss in past five years no greater than 20% (31.8%) Fail
Valuation Normalized P/E < 18 20.28 Fail
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
  Streak of dividend increases >= 10 years NM NM
  Payout ratio < 75% NM NM
  Total score   4 out of 8

Source: S&P Capital IQ. NM = not meaningful; Berkshire has never paid a dividend. Total score = number of passes.

Since we looked at Berkshire Hathaway last year, the company has seen its score drop by two points. Falling cash flow contributed to the move, but investors who already own shares should be relatively pleased about the stock's 30% jump in the past year despite the impact it's had on valuation.

It can be hard to separate the business of Berkshire from the personality of Buffett. But, when you strip away the legend, Berkshire has a simple business model: build up a core insurance business, write policies that make sense, and do an above-average job of investing money between the time you collect it as insurance premiums and the time you pay it out in claims.

Admittedly, though, Buffett is a huge asset. Companies f