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Is Berkshire Hathaway a Buy?

By Matthew Frankel, CFP® - May 4, 2018 at 2:32PM

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The Warren Buffett-led conglomerate is always a good investment, but there's reason to think it's about to become a better one.

Berkshire Hathaway (BRK.A 3.75%) (BRK.B 4.02%), the conglomerate that billionaire investor Warren Buffett has led for more than half a century, is always a good long-term investment. However, there are 116 billion reasons it could be an extra smart stock buy now.

To be clear, in my view, it's never a bad time to add Berkshire Hathaway to your portfolio. Its diverse collection of businesses and stocks limits your exposure to any one area of the market, and its investments were chosen in part for their ability to do well even under poor economic conditions.

Warren Buffett in a crowd of people.

Image Source: The Motley Fool.

If you're not familiar with how the company makes its money, Berkshire's core business is insurance, which it sells through GEICO and several reinsurance subsidiaries. The company also owns more than 60 subsidiaries, many of which operate brands with household names like Duracell, Dairy Queen and Fruit of the Loom.

In addition, Berkshire owns a $174 billion stock portfolio with holdings in nearly four dozen companies, including massive stakes of Apple, American Express, Bank of America, and Coca-Cola, just to name a few. That portfolio generates almost a $1 billion in dividend income alone for Berkshire every quarter.

Over time, Buffett and his team have proven their ability to create value for shareholders, with annualized returns of more than 20% since the mid-1960s. And while Buffett himself has cautioned investors not to expect the same performance going forward -- the company has simply gotten too big -- there's no reason it can't keep delivering market-beating returns.

A mountain of money sitting idle

What has me most excited about Berkshire's near-term potential is its massive stockpile of cash. At the end of 2017, it amounted to $116 billion, and I'd be surprised if we don't find out that it had eclipsed the $120 billion mark during the first quarter.

Here's why this is a good reason to buy the stock: Buffett views this hoard as a major problem. He doesn't want $120 billion just sitting in the bank earning virtually no returns -- he wants to put it to work. Berkshire's preference would be to acquire some large companies outright or deploy it by opening up large new positions in stocks, but the company has publicly entertained the idea of spending it on share buybacks or dividends if it can't find attractively priced acquisition targets.

In his most recent letter to shareholders, Buffett specifically said that valuation had been the biggest roadblock preventing him from making acquisitions in 2017. However, market volatility and rising interest rates may change that in 2018.

My colleague Jordan Wathen recently did a great job of explaining why investors should care about what happens with this money. Let's say that Berkshire decides to acquire $100 million worth of businesses at an average valuation of 20 times earnings, which would be on the pricey end of the scale for Buffett. This would mean an additional $5 billion in annual earnings for Berkshire -- a 34% increase over the company's 2017 earnings.

Always a smart investment

I've written before that if I were only allowed to own stock in one company, it would be Berkshire Hathaway -- hands down. And that's more true today than ever before. It has an excellent portfolio of subsidiaries and common stocks, and given the market's declines so far this year, I wouldn't be surprised at all if it finally uses its cash to make its investment portfolio (and thus, its earning power) significantly larger. Buying this stock while Berkshire still has a mountain of cash sitting idle could be an excellent long-term move -- because that situation won't last forever.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$417,401.43 (3.75%) $15,101.43
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$278.28 (4.02%) $10.76

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