We're close to getting the first glimpse of Berkshire Hathaway (BRK.A 0.30%) (BRK.B 0.20%) after Warren Buffett. The legendary investor plans to step down as CEO at the end of 2025. While Buffett will stay on as chairman, he will no longer be calling the shots at the huge conglomerate.
One Wall Street analyst recently issued a rare underperform recommendation for Berkshire Hathaway. Buffett's imminent departure was a key reason behind the negative view.
Where will Berkshire Hathaway be in five years? I think the answer should be encouraging to shareholders.
What should remain the same
Much of what millions of investors admire about Berkshire Hathaway today should remain the same at the end of the decade. Incoming CEO Greg Abel has no reason to make drastic changes. As the old saying goes: If it's not broke, don't fix it.
Abel said as much in the question-and-answer session at Berkshire's annual shareholder meeting earlier this year. He noted that the company has "a great culture" instilled by Buffett and his longtime business partner, the late Charlie Munger. Abel stressed that management will always "maintain the reputation of Berkshire" and ensure that its operating businesses continue to generate strong cash flow. He stated that the company will follow the same philosophy that it has had for the last six decades.
Look for Berkshire's many subsidiaries to continue operating autonomously, with Abel and his team managing the capital they receive and deploying the capital they create. It's a safe bet that Berkshire's insurance and energy businesses will remain its top cash cows.
The approach for allocating capital will almost certainly stay the same as well. Abel understands how important this function is. And he knows how important managing risk is. In the shareholder meeting, Abel mentioned the need to "thoroughly understand" the prospects and underlying risks of businesses before investing in them. Buffett's mindset isn't going away.
What could change
That said, Berkshire Hathaway almost certainly will change somewhat over the next five years. If nothing else, the makeup of the companies it owns in whole or in part through equities will look different.
The conglomerate has a massive cash stockpile to fund major acquisitions. Abel will continually be on the hunt for smart ways to put that money to work for shareholders. One big deal is expected to close shortly before he takes the helm as CEO -- the pending acquisition of Occidental Petroleum's (OXY +1.30%) OxyChem chemicals unit.
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Key Data Points
Perhaps the makeup of Berkshire's equity investment portfolio will change, too. If Abel gives the company's current investment managers, Todd Combs and Ted Weschler, greater financial resources under their control, we could see more tech stocks in the mix than has been the case in the past.
It's even possible that Berkshire Hathaway could at long last initiate a dividend program. This would only happen if Abel and the board felt that dividend payments were the best way to reward shareholders, though.
A prediction for Berkshire Hathaway in 2030
Buffett told shareholders in May, "I think the prospects of Berkshire will be better under Greg's management than mine." Could he be right? I think so.
However, I don't expect Berkshire's shares will soar as much over the next five years as they have over the last five years. That won't be a reflection on Abel's leadership but will instead be a result of market dynamics.
Still, I predict that Berkshire Hathaway will have a market cap of between $1.5 trillion and $2 trillion in 2030. And I believe that the conglomerate will be poised to enter a new decade with the wind at its back. Abel (and Berkshire itself) will be standing on the shoulders of giants -- Buffett and Munger. The culture and philosophy these two men have established should help extend Berkshire's remarkable success story.
