Would you invest in a well-diversified financial conglomerate that has generated strong compound returns for shareholders for years? Even better, it's one that uses the stable stream of cash from the companies in its portfolio to take advantage of opportunistic investments as they arise. Best of all, it's trading at a 25% discount to where it was a few months ago.
I'm not talking about Warren Buffett's Omaha, Nebraska-based Berkshire Hathaway (BRK.A -0.52%) (BRK.B -0.83%) but Bryant Riley's Los Angeles-based B. Riley Financial, Inc. (RILY 37.57%). The Motley Fool found that Berkshire has created $600 billion of shareholder value since 1965, delivering an average annualized return of 20%, or a whopping 3,300,000% over the years. B. Riley has gained over 300% during the past three years and more than 2,000% during the past decade. Could this conglomerate become the next Berkshire Hathaway?
Building a Berkshire?
B. Riley is a conglomerate that describes itself as a "diversified financial-services platform." It operates across various businesses including investment banking and capital markets, wealth management, auctions and liquidations, and financial consulting.
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Like Berkshire, B. Riley also operates companies that it has acquired. Its communications sector includes well-known internet service providers like Juno and Net Zero, as well as the internet-based phone service magicJack.
B. Riley's views its communications businesses, its brand portfolio, and its recurring cash flows from wealth management as springboards to investment opportunities. This approach is reminiscent of one of Buffett's strategies. Berkshire has a stable of steady businesses like GEICO and Burlington Northern Santa Fe railroad that throw off lots of cash, enabling Berkshire to pursue accretive acquisitions or investments when they come up. Look no further than Berkshire's recent announcement that it is acquiring insurer Alleghany (Y) for $11.6 billion. In 2017, Berkshire took a stake of almost 10% in STORE Capital (STOR) when the stock price faltered on negative investor sentiment about mall-based retail. Buffett also used Berkshire's strong position to invest in many of the large U.S. banks during the financial crisis of 2007-09.
Similarly, B. Riley was recently able to use its own strong position to make an offer to take Lazydays Holdings (LAZY -1.58%) private in a market that it says isn't giving Lazydays credit for its growth potential. Lazydays rejected the offer, but it shows that B. Riley is ready to deploy its capital when it sees an opportunity it likes. in a similar vein, B. Riley was able to acquire then-publicly traded magicJack in 2018 at a time when the stock was struggling. Additionally, B. Riley has identified the shakeup in traditional brick-and-mortar retail over the last few years as an opportunity to make some strategic investments and has acted on this by taking stakes in brands like Hurley, Justice, bebe, and Limited Too.
One key difference
There is a key difference between the two companies involving returning capital to shareholders. While Berkshire has never paid a dividend, preferring share repurchases, B. Riley paid out $12.50 a share in regular dividends and special dividends to its shareholders last year. You can't argue with Berkshire's results over the years, and shareholders will happily live without a dividend with the types of returns it has given them. Still, I like B. Riley's approach of rewarding shareholders with a steady stream of dividends. The dividend yield on the shares is a healthy 4.3% based on 2022 earnings forecasts.
Is B. Riley the next Berkshire?
B. Riley will have to keep this up for a long time if it wants to match Berkshire's decades of generating value for shareholders. By using recurring revenue to fund other investments, shrewdly allocating capital, and remaining committed to shareholder returns, B. Riley, in my view, is taking the first steps on the road toward becoming the next Berkshire Hathaway. Even if my prediction doesn't quite pan out, investors will be pretty happy with something approaching the same trajectory.
