In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss the company's recent investments, its third-quarter earnings, and how investors know that Warren Buffett thinks Berkshire's stock is attractively priced.
A full transcript follows the video.
This video was recorded on Nov. 5, 2018.
Jason Moser: We're going to start the week with Uncle Warren, his latest investment in the payments space. Berkshire Hathaway earnings came out over the weekend, as well. We have a lot to talk about with Berkshire Hathaway. Let's go ahead and get started first and foremost with Berkshire buying into fintech. Matt, this was something that I don't think a lot of us were expecting, but it's also not terribly surprising. He likes investing in those market opportunities. I think, more than anything, the most interesting part was the companies he decided to invest in.
Matt Frankel: Just to be clear, first of all, this wasn't initiated by Warren Buffett himself. He doesn't understand these companies well enough by any stretch to make an investment in them. This was by Todd Combs, one of Buffett's two main stock pickers, and he's definitely the more techie of the two. Buffett gives him a stamp of approval, so we can consider it a Warren Buffett investment. The two companies are both foreign companies. There's Paytm, an Indian mobile payments company, and StoneCo, which is in Brazil.
At first glance, these might sound weird. Like, why would Berkshire be looking at some foreign fintech companies? But they do both have a bunch of Berkshire-like qualities. First and foremost, they are market leaders in their economies. They both have big market shares. They're both very well-known in their local markets. They do have that going for them. It's like how Berkshire invests in Coca-Cola because it's the leading soft drink provider, same idea there, just on a more fintech-y and more rapidly growing scale. And StoneCo is the only public one out of the two. These are both relatively small investments for Berkshire, $300 million a pop. That sounds pretty big, but it's not when you're talking about a $500 billion company.
I'm glad to see Berkshire finally putting more of its cash to work in outside-the-box ways. They've had a real issue building up cash. They still have more than $100 billion after spending some of their money on a bunch of new stock investments and things like that. I'm really excited that they're finding ways to put their money to work in ways that could actually end up moving the needle if these companies prove really successful.
Moser: Yeah. It's no secret, we obviously love these payment companies all over the world. Plenty of opportunity out there. Even he noted it -- payments are a huge deal worldwide, is what he said. Berkshire already owns stakes in Visa, MasterCard, and American Express. It's neat to see them get some of these smaller firms in there that are a bit more based on technology, like you said. Definitely a little bit more difficult to understand. I think this is also a testament to the kind of team that he's building there at Berkshire Hathaway. I think investors need to feel really good about that.
I wanted to mention a little bit about the earnings that came out for Berkshire Hathaway this weekend. It was, generally speaking, a pretty good quarter. They saw a nice bump in operating income there. It did seem like the insurance underwriting profit saw a nice boost vs. last year. There were some natural disasters last year that hit them on that line, of course. But, another quarter of big share repurchases for Berkshire Hathaway, as well, wasn't it?
Frankel: This was the first time they've been allowed to repurchase shares under the new plan that allows Warren Buffett and Charlie Munger to pretty much buy back shares whenever they both agree it's a good time. Berkshire bought back $928 million worth of shares this quarter. That sounds like a lot, but the takeaway here is not that this is a real needle-moving thing. Like I said, Berkshire is a $500 billion company, buying back less than $1 billion worth of stock isn't anything to get that excited over. But, the new buyback policy says that they can only buy it when Buffett and Munger both agree that the stock is trading at a substantial discount to its intrinsic value. The takeaway here is that Buffett really considers Berkshire cheap at the current levels.
Moser: Yep. And I think right now, it's about 1.4X book, right?
Frankel: Yeah, which is actually pretty low for Berkshire. If you look at the history, Berkshire oscillates between 1-2X book. So, it's not that expensive in a historic context.
Moser: The former benchmark that they had given themselves was 1.2X book, which seemed very reasonable. But by the same token, I don't have any problem with them lifting that benchmark and just saying, essentially, "We'll do it when we feel like it makes sense," because that's ultimately what they're doing. They've got a pretty good track record so far, so I think we can trust them. I do wonder how some shareholders may feel about that vs. dividends. Certainly, dividends are something that they're going to hear more and more about as time goes on. I wonder if they're going to feel a little bit more pressure to cave into at some point. But I haven't really gotten any sense of anything like that in regard to dividends yet. Have you noticed anything? Do you have any feelings there?
Frankel: As the cash was starting to build up Warren Buffett for the first time ever, I think, mentioned dividends as a real possibility. Then he walked it back over the next few quarters. His attitude is pretty much, "If you want a 3% dividend from the stock, just sell 3% of your shares every year." He said, "Trust me to do what I will with the profits. If you want income off Berkshire, just start gradually selling your stock that way."
Moser: That's a fair point.
Frankel: It's tough to argue with that. I mean, I'm a financial planner and I trust my money with Warren Buffett. I trust him to make the best decisions with Berkshire's income.
Moser: Well, if he's good enough for you, he's good enough for me, and he should be good enough for all of our listeners. That's the takeaway.