This weekend, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) will release first-quarter earnings and hold its 55th annual meeting -- virtually. Usually, the Berkshire Hathaway annual meeting is "Woodstock for Capitalists," where like-minded investors from all over the world gather in Omaha, Nebraska, to trade ideas and talk shop. Buffett and vice chairman Charlie Munger normally take questions for seven hours in a packed stadium.
However, this year, the meeting will be held virtually, with just a brief Q&A with Warren Buffett and Greg Abel, vice chairman of non-insurance operations. Notably, vice chairman Charlie Munger won't be sharing the stage with Buffett this year for the first time, as coronavirus throws a wrinkle into everyone's travel plans.
The meeting will start at 4 p.m. Eastern Daylight Time, with an abbreviated Q&A session following the meeting. Questions will be asked by journalists Becky Quick, Carol Loomis, and Andrew Ross Sorkin. Although this year's meeting will be much shorter, here are some of the questions I'm hoping get asked and answered, either in the first-quarter report or during the limited Q&A.
What's the pandemic's effect on Berkshire's insurance operations?
With the COVID-19 pandemic sweeping across the world, it's an open question as to whether Berkshire's insurance operations might have some liability due to shutdowns of businesses across the U.S. and the world. It's not clear whether Berkshire's insurance operations have direct pandemic liability policies; if they do, it's likely a very small sliver of the Berkshire insurance empire.
Yet even if Berkshire doesn't have any direct exposure to pandemics today, its insurance managers may now be contemplating such policies. After all, there will likely be demand for such a policy in the future, though given the huge costs of COVID-19, it may be cost-prohibitive.
Buffett had actually mentioned pandemic insurance as a possibility for Berkshire all the way back in 2009, when the H1N1 flu pandemic broke out. At the time, Buffett said, "You could get us to quote a policy on the present potential pandemic ... you may not like how much Berkshire would charge. You need someone with a real sense of the probabilities."
Does Berkshire Hathaway still own airline stocks?
While many have expected Berkshire to take advantage of a downturn and buy more stocks, all we know today is what Berkshire has been selling, not buying. Because Berkshire owned over 10% of both Delta Airlines (NYSE:DAL) and Southwest Airlines (NYSE:LUV), Berkshire had to disclose that it had trimmed both stakes below the 10% threshold in early April.
While we may not learn the specifics until the release of Berkshire's 13F filing in the middle of May, it's quite possible Berkshire sold its other airline stocks as well. Berkshire had owned all four major U.S. airlines prior to the outbreak, but it hasn't had to disclose if it sold the others yet, since it didn't own more than 10% of those companies.
I'm anticipating more airlines sales. Airlines are some of the worst-hit companies amid COVID-19 as their high fixed costs and close-to-zero revenue mean they are burning a lot of cash, and they'll have to tap government bailout programs in order to avoid bankruptcy. That may help keep airlines in business, but it could also come with significant shareholder dilution. Under current terms, airlines will have to pay back a portion of the government loan before other types of shareholder returns; additionally, the government will receive warrants on the airlines' stocks, diluting current shareholders.
The uncertainty around the depth of the recession as well as the terms of more government aid is likely why Buffett trimmed his stakes in Delta and Southwest at the very least, and possibly sold even more of his airline holdings as well.
Did Berkshire buy anything new?
While we do know that Buffett trimmed some airline stocks, we don't yet know if he bought any new stocks during the quarter. At the end of 2019, Berkshire had about $125 billion in cash and securities, a massive cash hoard that could have been deployed into new holdings, as Buffett did during the global financial crisis in 2008 and 2009.
However, vice chairman Charlie Munger told The Wall Street Journal last month that Berkshire had been "conservative" amid the downturn. While that doesn't mean Berkshire hasn't bought anything, it will likely be a disappointing list to some investors, given the market's big rally off the March lows.
Once again, we might not learn about any new buys until the 13F filing, given the abbreviated nature of the Q&A; however, it's possible Buffett may reveal some new holdings in the Berkshire universe this weekend.
How is Berkshire balancing humanitarian concerns of retaining employees of shuttered businesses versus the interests of shareholders?
A large portion of Berkshire's operating businesses are in things such as manufacturing, retail, and transportation, which have likely been heavily affected by COVID-19. Yet while many competitors are likely laying off or furloughing employees, it's an open question as to whether wholly owned businesses under Berkshire are doing the same.
Berkshire is a famously decentralized operation that often leaves such decisions to the managers of each business; however, these are extraordinary times, and Berkshire does have the cash reserves to help support employees of wholly owned subsidiaries. Therefore, it's possible Berkshire's investors may endure some pain in order to support employees for a period of time.
Berkshire has made similar non-economic gestures in the past, including keeping dying businesses alive for longer than other owners might tolerate. One case in point was actually the company's namesake Berkshire Hathaway textile plant. Berkshire knew all the way back in the 1970s that the outlook for its textile operations, acquired in 1965, was bleak. Yet the company kept operations running until finally shutting them down in 1985.
In his 1977 letter to shareholders, Buffett wrote about his justification for keeping the business going and his modest hopes for the future:
A few shareholders have questioned the wisdom of remaining in the textile business which, over the longer term, is unlikely to produce returns on capital comparable to those available in many other businesses. Our reasons are several: (1) Our mills in both New Bedford and Manchester are among the largest employers in each town, utilizing a labor force of high average age possessing relatively non-transferable skills. Our workers and unions have exhibited unusual understanding and effort in cooperating with management to achieve a cost structure and product mix which might allow us to maintain a viable operation. (2) Management also has been energetic and straightforward in its approach to our textile problems. In particular, Ken Chace's efforts after the change in corporate control took place in 1965 generated capital from the textile division needed to finance the acquisition and expansion of our profitable insurance operation. (3) With hard work and some imagination regarding manufacturing and marketing configurations, it seems reasonable that at least modest profits in the textile division can be achieved in the future.
This time around, Berkshire would likely only be supporting businesses on a temporary basis -- albeit for an uncertain amount of time -- and not a permanently impaired operation such as U.S. textiles in the 1970s. On the other hand, Berkshire is now much, much larger, with many more mouths to feed, so to speak.
In any case, I'm hoping to hear how Berkshire is balancing the interests of shareholders and subsidiary employees at this critical time.
What does Warren think of the stay-at-home orders and unprecedented fiscal and monetary policies?
The country is currently seeing two unprecedented developments, even for Buffett's 89-year lifespan: A global pandemic, and an overwhelming fiscal response from the Federal government and monetary response from the Federal Reserve.
Other CEOs have made some comments about the wisdom of recent stay-at-home orders from state governments. On the recent Tesla (NASDAQ:TSLA) earnings call, CEO Elon Musk decried mandated shelter-in-place orders as anti-American. I'm guessing Buffett won't be so antiestablishment, but there will likely be some politically charged questions posed to Berkshire's leaders tomorrow.
More interesting might be Buffett's take on the actions by the Federal Reserve and federal government. The CBO currently predicts this year's budget deficit will reach a stunning $3.7 trillion, up from an estimated $1.1 trillion prior to COVID-19 and more than doubling the all-time record deficit of $1.4 trillion set back in 2008.
Buffett has said he was surprised by the lack of inflation after the Fed's previous extraordinary actions to support the economy after the global financial crisis, so it might be interesting to hear his current take on this year's record deficit and debt.
What might the long-term impacts of coronavirus be, both socially and economically?
Finally, it might be interesting to hear Buffett's take on the long-lasting impacts of the virus, both on a social and economic level. Does he expect more remote work and education on a permanent basis? More government involvement and control over the economy? Increasing inequality, or more worker protections and regulation?
While it would be great to hear Buffett's take on what the post-COVID world might look like, he's also the man who coined the phrase, "Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future." So, I'm guessing Buffett might punt on any question that aims to look through the next few years.
One thing's for sure: This year's meeting will definitely be different from the 54 meetings that have come before it. Stay tuned!