What could be more perfect as a retiree's dream stock than one run by a 90-year-old guy? I'm referring to Warren Buffett, of course, and to his company, Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%). Buffett is not retired, though, and is continuing to run the remarkable company he has built over more than 50 years.
Here's a closer look at Berkshire Hathaway, and why you might want to consider it for your retirement portfolio.
Image source: Getty Images.
Meet Berkshire Hathaway
Berkshire Hathaway is a conglomerate, though Buffett bristles a bit at that label, as many conglomerates have been formed by overpaying for companies (often with stock, diluting shareholders' stakes) that were not necessarily wonderful. Buffett is known for being rational, though, and for his discipline. He aims to never overpay, and is reluctant to pay with stock, preferring cash. (And Berkshire is usually brimming with cash.)
Businesses under Berkshire's roof number more than 60, and feature names such as Benjamin Moore, Brooks, International Dairy Queen, Johns Manville, Justin Brands, McLane, Business Wire, Clayton Homes, Forest River, Fruit of the Loom, GEICO, Nebraska Furniture Mart, NetJets, Pampered Chef, See's Candies, Shaw Industries, and the entire BNSF railroad.
Much of Berkshire Hathaway's value lies in the shares of stock it owns in other companies. Together, at the end of 2020, the shares were worth more than $280 billion. The top five holdings are below:
|
Company |
Percentage of Company Owned |
Cost at Purchase |
Market Value as of Dec. 31, 2020 |
|---|---|---|---|
|
Apple |
5.4% |
$31.1 billion |
$120.4 billion |
|
Bank of America |
11.9% |
$14.6 billion |
$31.3 billion |
|
Coca-Cola |
9.3% |
$1.3 billion |
$21.9 billion |
|
American Express |
18.8% |
$1.3 billion |
$18.3 billion |
|
Verizon Communications |
3.5% |
$8.7 billion |
$8.6 billion |
Data source: Berkshire Hathaway.
Buffett and his two younger investing lieutenants have great track records when it comes to investing. The newish stake in Apple, for example, has quadrupled in value, delivering roughly $90 billion in value to Berkshire.
The best thing about Berkshire is its beautiful business model: Its various businesses generate a lot of cash every year, and the money is invested by great investors. Some of it goes to the more capital-intensive holdings, such as the BNSF railroad, that need cash infusions to buy more rail cars, maintain tracks, and so on. But much of it gets invested in promising stocks -- and is also used to buy great companies outright.
Meanwhile, should the economy take a downturn, Berkshire stock is likely to be more resilient than many others, as it encompasses so many essential products and services, such as insurance, energy, and underwear.
In his latest letter to shareholders, Buffett reported overall growth from the mid-1960s to 2020 of 2,810,526% -- equal to a compound annual gain of 20%. In contrast, the S&P 500 averaged 10.2% annually over that period, for a total of 23,454% growth. The company's growth rate has been slowing, overall, in recent years, as it can be hard for a huge company (recent market value: $588 billion) to double and triple in size in short order.
Image source: Getty Images.
Why Berkshire Hathaway is perfect for retirees (and others)
So why is Berkshire Hathaway so good for retirees? Well, the main upside it offers is stability. A key goal of many retirees is preserving capital -- you don't want your nest egg to shrink much if you're drawing from it for your income. It's true that Berkshire doesn't pay a dividend, but there may come a time, if Buffett sees dwindling compelling uses of company cash, when a dividend will be initiated. Buffett has deployed a lot of cash rewarding shareholders by repurchasing shares of Berkshire stock at favorable prices.
Anyone owning shares of Berkshire stock can expect the value of the shares to grow over time, though not at breakneck speed. There may be no dividend, but if you buy Class B shares, which are priced far lower than Class A shares, you can generate income from your Berkshire stake just by selling a few shares at a time, as needed. Or you can keep your Berkshire shares as ballast for your portfolio, selling off shares of other companies and/or enjoying income from dividend-paying stocks.
Succession plans
Given that Buffett is 90, it's worth addressing succession plans. Some investors worry about what happens when Buffett loses his sharpness and what happens when he's no longer at the helm. He has planned for it all. Company leadership (such as the board of directors) has been instructed to alert him when it's time to step aside, for starters. As for who will take his place, there's no one person to do it. His two investing lieutenants are in place to continue making investment decisions, and he has given the board of directors the name of his chosen a successor (perhaps in a sealed envelope). His son Howard will be in the mix, too, ensuring that the company maintains its productive culture.
If you're looking to fill out a stock portfolio for retirement -- or even if you're still in your 30s, 40s, or 50s -- consider adding some Berkshire stock. And by the way, the company's annual meeting, which is usually held in Omaha with tens of thousands of shareholders attending, will be held on May 1, streamed on Yahoo! due to the pandemic. Tune in: Buffett and his partner Charlie Munger typically answer questions for hours, and are both enlightening and amusing when doing so.
