Long-term investors have been taken for quite the ride over the past two months. The proliferation of the coronavirus disease 2019 (COVID-19), which has been confirmed in over 2 million people worldwide, has led to unprecedented mitigation measures designed to slow its transmission. But as a side effect, it's also shut down nonessential businesses and sent unemployment levels rocketing higher in the United States.
After reaching an all-time closing high on Feb. 19, the benchmark S&P 500 took just 17 trading sessions to dip into bear market territory (i.e., a 20% decline) and a total of 33 calendar days to lose 34% of its value. Both represent the quickest and steepest declines in history.
Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.
Yet this record-breaking volatility and stock market crash have also opened the door to opportunistic investors.
One such "deal" that long-term investors may want to consider is Warren Buffett's conglomerate, Berkshire Hathaway (BRK.A +0.16%)(BRK.B +0.14%), which is trading at levels that haven't been consistently seen since the fourth quarter of 2017. Here are seven perfect reason to add Berkshire Hathaway to your portfolio and never sell.
1. You get Warren Buffett as your portfolio manager
Perhaps the only reason investors really need to buy Berkshire Hathaway stock is that, in a roundabout way, you get Warren Buffett as your investment manager. Buffett's buy-and-hold ethos has created nearly $400 billion in value for Berkshire's shareholders over the past five decades. The Oracle of Omaha, as he's known, has a knack for identifying value and businesses with sustainable competitive advantages.
He's also quite adept at "being greedy when others are fearful." Many of Buffett's most successful long-term investments were purchased during bear markets or periods of heightened uncertainty, as we're experiencing now.
Image source: Getty Images.
2. Berkshire's track record speaks for itself
If the Warren Buffett name isn't reason enough to buy Berkshire Hathaway, then perhaps its average annual return will do the trick.
According to the company's 2019 shareholder letter, the S&P 500 has averaged an annual return of 10%, inclusive of dividends, between 1965 and 2019. By comparison, Berkshire Hathaway's per-share market value has delivered a compound annual return rate of 20.3% over the same time frame, with only 11 years in the negative and 35 years of (at least) positive double-digit returns. In aggregate, the S&P 500 is up almost 19,800% in 55 years, whereas Berkshire Hathaway's stock is up... 2,744,062%. And no, that's not a typo.
3. $4.7 billion in annual dividend income
The thing about buying profitable, time-tested businesses with sustainable competitive advantages is that they often pay a dividend. In Berkshire Hathaway's case, approximately two-thirds of its 52 held securities in its portfolio currently pay a dividend. Add up these payouts over the course of the next year, and Berkshire Hathaway is on track to collect about $4.7 billion in dividend income.
What's particularly interesting is that Buffett's yield on cost -- i.e., its dividend yield based on its initial cost basis -- is much higher than you probably realize. With a cost basis for Berkshire's entire portfolio of $110 billion, Buffett is generating a yield on cost of better than 4% each year. In fact, Buffett has held Coca-Cola for such a long period of time that he doubles his money on it every two years, based solely on its payout relative to Berkshire's initial cost basis.
Image source: Getty Images.
4. A near-record cash hoard
In addition to making great investments, Buffett also understands the importance of having dry powder at the ready for when unique situations present themselves. As of the end of the fourth quarter, Berkshire Hathaway was sitting on a near-record $128 billion in cash. There's little doubt that Buffett and his team have put some of this capital to work over the past two months.
Furthermore, this cash serves as the jumping off point for game-changing acquisitions. I'm going to touch on the importance of acquisitions in an upcoming point.
5. A healthy capital return plan (despite no dividend)
If there's a knock against Berkshire Hathaway, it's that it doesn't pay a dividend to shareholders, despite the fact that it'll be generating around $4.7 billion in dividend income itself in 2020. Then again, this is a purposeful move on Buffett's part, as his goal is for Berkshire's cash to be put to work in generating additional capital.
But even though shareholders aren't receiving a dividend, they aren't forgotten. One of the absolute favorite stocks for Warren Buffett to buy is his own. For instance, in 2019, Buffett repurchased $5 billion worth of Berkshire Hathaway's stock, thereby reducing the company's outstanding share count by about 1%. Fewer shares outstanding often has a positive impact on earnings per share, which can ultimately make a stock more attractive on a valuation basis.
Image source: Getty Images.
6. Strong cyclical tie-ins
A sixth great reason to buy Berkshire Hathaway stock and never sell is that a bet on Buffett really amounts to a long-term bet on the growth of the U.S. or global economy. That's because Buffett's portfolio is unmistakably cyclical in nature. In other words, it does well when the U.S. and global economy are expanding, which occurs far more often than periods of contraction.
Buffett's favorite sector is financials, and within financials its money-center banks like Bank of America, U.S. Bancorp, JPMorgan Chase, and Wells Fargo. Although big banks become susceptible to weakness during periods of economic contraction of recessions due to rising loan delinquencies and lower net interest income, they're also absolute moneymaking machines during periods of economic expansion, and have been known to deliver some of the juiciest shareholder yields (i.e., the amount of money returned to shareholders through the combination of dividends and share repurchases).
7. Ownership in a diverse group of companies
Last, but not least, buying into Berkshire Hathaway gives investors exposure to a diverse group of companies that Buffett and his team have acquired over many decades.
As noted, Buffett will occasionally use his company's cash on hand to acquire entire companies. Over five decades, Buffett has gobbled up about 60 businesses from a host of sectors and industries, including energy, insurance, transports, and retail. These buyouts include well-known companies like insurer GEICO and railroad operator BNSF.
Although Buffett hasn't pulled the trigger on a needle-moving acquisition in four years, his track suggests that when he does there's a good chance of it being a long-term positive for Berkshire Hathaway.
I believe these seven points represent more than enough reason for investors to add Berkshire Hathaway to their portfolio for the long haul.
