Warren Buffett, longtime CEO of Berkshire Hathaway, transformed a struggling textile maker into a multinational holding company with a valuation of roughly $800 billion. In part, Buffett accomplished this unparalleled success through his investing prowess: He and his investment managers buy individual stocks with premiums from its insurance business, also known as the float.
While Buffett doesn't comment on all of Berkshire's investments, the company must list its holdings 45 days after each quarter. In Berkshire's latest filing, the company showed investments totaling $814 million in three homebuilders.
With mortgage rates at a 20-year high, some might question the strategy, but here are two possible reasons: Experts estimate the U.S. has underbuilt by 6.5 million single-family houses since the Great Recession, and homebuilders can offer lower introductory mortgage rates than home lenders.
As a result of low supply and better rates, more prospective buyers are turning to builders for a path to homeownership. So, let's look at the three homebuilders' stocks and whether they are suitable investments.
1. D.R. Horton
D.R. Horton (DHI 0.78%) is the largest by volume in the United States since 2002 and, as a result, has the largest market capitalization at $38.3 billion. The company operates in 33 states, and its stock is up nearly 21% in 2023, outpacing the S&P 500's return of 13%.
Beyond its impressive 2023 performance, D.R. Horton pays a quarterly dividend of $0.25, equating to a yield of 0.88%. Dividend investors might not be too impressed by that, but the company has consistently paid a quarterly dividend since 1997 and has raised it yearly since 2015.
Management is also returning capital to shareholders through share repurchases, with $1.1 billion expected in 2023. What's more impressive is that D.R. Horton's share count is down 10% over the past five years, meaning each remaining share is becoming more valuable over time.
DHI shares outstanding data by YCharts.
Digging into the company's financials, management expects cash provided by its homebuilding operations to be $3 billion for its fiscal 2023, which would be at least an increase of 58% from its $1.9 billion during fiscal 2022.
One potential downside to watch: Its gross margins (sales minus cost of goods sold) fell from 30.1% to 23.3% from its third quarter of 2022 to the third quarter in 2023 as the company offered incentives and lowered its home prices to counteract high mortgage rates. To see how that can weigh on a homebuilder, you can look at its net sales and net income. Specifically, during its third quarter, it reported net sales of $9.7 billion, a 10% increase year over year. But net income for the same period was $1.35 billion, a 19% decrease from the prior-year quarter.
Despite the drop in profitability, management says that it is seeing home prices and incentives stabilize, as well as some reduction in construction costs. If the trend actualizes, then investors can expect D.R. Horton to navigate the high mortgage rates about as well as any of its competitors, all while management prioritizes returning capital to shareholders.
2. Lennar
Another homebuilder that Berkshire recently bought is Lennar (LEN 0.98%) (LEN.B), which operates in 26 states and has a market capitalization of $37.4 billion. Like D.R. Horton, Lennar stock is having a banner year in 2023, with an appreciation of 23% for its Class A stock and 35% for its Class B stock. The Class A common stock grants one voting right per share, while the Class B stock provides 10 votes per share to its holders.
Lennar's quarterly dividend of $0.375 results in a 1.3% yield presently. While the company has consistently raised its dividend over the years, the latest increase occurred in early 2022. As a result, investors should not anticipate an annual dividend increase.
Still, Lennar has used share repurchases to lower its outstanding shares by 11% over the past five years, and it spent $763 million on share buybacks during its first three fiscal quarters of 2023.
For the bear case, Lennar faces a worse net sales and net income slowdown than D.R. Horton. The company's most recent quarterly results showed $8.7 billion in net sales and $1.1 billion in net income, a year-over-year decrease of 2.3% and 25%, respectively.
Where Lennar has excelled is that management has gone to great lengths to pay down its previously outsize debt. At its peak in early 2018, Lennar's net debt (total debt minus cash and cash equivalents) reached over $10.5 billion. Since then, management has flipped the company's weakness into a strength by erasing the debt, and now has $568 million in cash. That has led to Lennar's healthiest balance sheet ever.
LEN.B net financial debt (quarterly) data by YCharts.
3. NVR
The other homebuilder that Berkshire recently purchased is NVR (NVR -1.01%), the smallest of the bunch by market capitalization at $20 billion. It operates in 35 metropolitan areas and 15 states under its Ryan Homes, NVHomes, and Heartland Homes brands, and its stock has generated a 30% return in 2023.
Unlike the other two stocks, NVR does not currently pay a dividend, but it does have a share repurchase program that began in 1994. Over the past five years, management has lowered its share count by 9%, and its board recently authorized the repurchase of another $500 million worth of its stock.
Another differentiator from D.R. Horton and Lennar is NVR's exclusive focus on homebuilding, in contrast to the other two companies, which engage in both land development and home construction. This strategy limits the risk of owning expensive land during down cycles in the housing market, but it can also limit the upside during housing booms. As a result, NVR has the best balance sheet of the bunch, with $1.8 billion in cash.
Similar to the other two builders on this list, NVR's revenue and net income are facing challenges. During the first half of 2023, the company generated revenue of $4.4 billion and net income of $748 million, representing a year-over-year decline of 10% and 13%, respectively.
NVR net financial debt (quarterly) data by YCharts
NVR's homebuilding-only business model and outstanding balance sheet offer investors a safer investment than D.R. Horton and Lennar, but the lack of a dividend might be less appealing for income seekers.
Are these three Berkshire stocks buys?
All of these homebuilding stocks have performed exceptionally well in 2023, and despite the slowdown in business, all are well-positioned to capitalize on the current state of the housing market. If interested in buying homebuilder stocks, investors would be wise to follow the lead of Warren Buffett's Berkshire Hathaway by taking a basket approach and not just buying one of these companies as a way to diversify your holdings and limit risk.
