Famed investor Warren Buffett spent six decades turning Berkshire Hathaway (BRK.B 0.34%)(BRK.A 0.46%) into something rare: a collection of durable businesses tied together by one central job -- capital allocation.
Now that Buffett is no longer CEO, that job is moving into Greg Abel's hands. And Abel will undoubtedly be under the microscope, because Berkshire's next decade of returns will likely depend less on operational execution and more on how its cash gets deployed. After all, the conglomerate has a lot of cash (we're talking hundreds of billions of dollars).
But who will be making the biggest capital allocation decisions at Berkshire? Will it be Abel or someone else?
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Capital allocation is central to Berkshire's culture
Berkshire is decentralized on purpose. For the most part, the conglomerate's operating companies run themselves. But the excess capital they throw off ultimately gets funneled back to Omaha, where it can be redeployed through acquisitions, share repurchases, or stock positions.
This capital allocation work from Berkshire's headquarters is what Buffett built his reputation on, and it will likely be what makes or breaks Abel's reputation going forward.
While Abel hasn't spoken in detail about where the bulk of the responsibility for capital allocation will lie at Berkshire, it will be in his hands if Buffett gets his wish.
At Berkshire's 2024 annual meeting, Buffett said, "I would leave the capital allocation to Greg. He understands businesses extremely well, and if you understand businesses, you understand common stocks."
The size of Berkshire's cash pile is what makes this transition so consequential. Berkshire boasts well over $350 billion in cash, cash equivalents, and U.S. Treasury bills. When the cash position is that large, a handful of decisions can drive shareholder outcomes.
Abel may share some capital allocation responsibilities
Berkshire Hathaway has long disclosed that Todd Combs and Ted Weschler managed portions of its public-stock portfolio, with Buffett managing the majority. But Berkshire announced in December that Combs would conclude his tenure at the company. This leaves investors with some questions, including whether Weschler will take over Combs' portion of the portfolio or if it will go to Abel. In addition, it's possible that Abel relies even more on Weschler than Buffett did, allocating an even larger portion of the portfolio to the investment lieutenant's management. After all, Weschler has an incredible track record when it comes to stock picking.
While it's possible that Weschler takes on even more responsibility at Berkshire, I suspect that Abel will follow Buffett's advice and become Berkshire's primary capital allocator, leaving a smaller portion to Weschler.
Beyond his 2024 comments, Buffett recently reinforced his confidence in Abel in a recent CNBC interview, saying he'd rather have Abel handling his money than any of the top investment advisors or CEOs in the United States.
Coming from the Oracle of Omaha, that says a lot.
NYSE: BRK.B
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Berkshire stock: What investors should watch next
So where does that leave investors?
Here's what I'd watch next: Berkshire's first truly large capital move under Abel. A modest equity trim or a bolt-on deal will not tell you much. But a decision that commits tens of billions of dollars will. When that first big move happens, investors may get an early glimpse of Abel's capital allocation approach.
Additionally, I'll be watching for any share repurchases. Since the second quarter of 2024, Berkshire has refrained from repurchasing its shares. If Berkshire resumes repurchases in the first quarter of 2025, it may suggest that Abel believes the stock is undervalued.
But investors shouldn't get their hopes up for any significant moves to occur immediately. The company was built around discipline and patience. As Buffett's hand-picked successor, Abel will likely honor those values. Abel, therefore, probably won't make a big move unless it's truly attractive -- and a great opportunity may not surface right away.
