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3 Reasons Buffett's Barrick Gold Buy Isn't Such a Crazy Move

By Dan Caplinger – Updated Aug 17, 2020 at 1:29PM

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The Berkshire Hathaway CEO has criticized the yellow metal as an investment numerous times. This is different.

Warren Buffett has been an investor for a long time, and his company, Berkshire Hathaway (BRK.A -1.04%) (BRK.B -1.09%), has generated huge returns during his tenure. Yet as the Oracle of Omaha approaches his 90th birthday and Berkshire's stock has dramatically underperformed the broader market recently, some investors are questioning whether his investment decisions are really still up to snuff.

Late Friday, Berkshire Hathaway released its latest stock portfolio holdings as of June 30. Among them was a completely unexpected company: gold miner Barrick Gold (GOLD 1.57%). Given how Buffett has criticized gold as an investment repeatedly in the past, the investment might seem on its face to contradict everything the Berkshire CEO stands for. Yet investors who question Buffett's motives here should understand a few reasons why buying a stock with the ticker symbol GOLD isn't inconsistent with the strategy that got Berkshire where it is today.

1. Gold mining companies are businesses, not commodities

Buffett's criticism of gold as an investment has always focused on the metal itself. In his 2011 shareholder letter, Buffett talked about how with $9.6 trillion -- the value of the 170,000 metric tons in gold worldwide at the time -- you could buy every acre of cropland in the U.S. and have enough money left over to buy ExxonMobil 16 times over. You'd even still have $1 trillion in cash left over. The Berkshire CEO noted that the cropland would be immensely productive and ExxonMobil would pay huge dividends, but the block of gold would still be the same block of gold.

Several gold bullion bars next to a chart with a yellow line going up to the right.

Image source: Getty Images.

Barrick Gold is a mining company, and unlike gold itself, mining companies can be productive assets. Indeed, Barrick has been immensely profitable over the past year and a half, capitalizing on the rise in gold prices to earn almost $4 billion in 2019 and another $757 million during the first half of 2020. Barrick has traditionally taken its capital and reinvested some of it into its business, finding growth opportunities to continue. In that vein, Barrick as an investment doesn't resemble gold bullion at all -- and buying Barrick stock isn't inconsistent with a belief that buying a commodity isn't a sound investing move.

2. Barrick is value-priced

Buffett has always looked to buy stocks when they were attractively valued, and right now, Barrick fits that bill. The stock trades at less than 11 times its earnings over the past 12 months -- even when you consider some of the COVID-19-related challenges that have held back its productivity during much of 2020.

Admittedly, Barrick's earnings are linked to the price of gold, and that's been a big part of why its stock price has jumped more than 50% in the first six months of 2020. Yet when you adjust for the asset impairment writedowns that the gold miner has had to take when gold prices fall, Barrick's operating earnings have been consistently positive even when gold itself was performing poorly.

3. Barrick pays a growing dividend

Buffett also likes stocks that reward shareholders with regular income. Barrick fits the bill, with a modest payout that currently represents a dividend yield of 1.2%.

Moreover, Barrick has shared its success with its shareholders by raising its dividends during good times. Just last week, the company delivered a 14% boost to its quarterly payout, marking the third time in the past four quarters that Barrick has hiked its dividend. The payment is now double what it was just a year ago -- and further increases are likely if profits continue to climb.

Buffett and gold could take some getting used to

Sure, it's always disorienting to see an investor make what seems to be an unusual move, and what Warren Buffett has said about gold in the past seemed to make it unlikely Berkshire would ever own a gold stock. Yet Barrick is one of the giants in the global mining industry, and it's better positioned than most of its rivals to take advantage of high and rising gold prices as long as they last.

Dan Caplinger owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Barrick Gold Corporation Stock Quote
Barrick Gold Corporation
GOLD
$16.15 (1.57%) $0.25
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$416,300.00 (-1.04%) $-4,367.49
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$276.31 (-1.09%) $-3.05

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