Warren Buffett is not one to give copious interviews, so when he does, it's a treat worth reviewing.
Although the chairman of Berkshire Hathaway
That was his message in today's Barron's online interview. Buffett, his partner Charlie Munger, and the company they run are sitting on $24 billion in shareholder cash with few attractive places to invest it. As Buffett has written in his annual reports over the past several years, stock prices leave much to be desired, and finding good value is like finding a needle in a haystack.
During the last five years, Berkshire has completed relatively few acquisitions, and paid an average of seven times pre-tax earnings for each, about half the market's current 14 times multiple on pre-tax earnings (while the S&P 500 is at 20 times projected 2003 after-tax income). Today, even with the market far below its 2000 peak, Buffett said, "We're not finding anything. We have more cash than ideas. The question is whether that will prevail for an unduly long time."
This said, Berkshire has made two acquisitions in 2003, totalling $3.2 billion, buying a manufactured-home maker and lender, and a grocery wholesaler. Buffett continues to seek businesses that he can project results for well into the future, shunning the unpredictable nature of technology firms. Quoting from the Barron's article:
Buffett has never been comfortable with technology stocks, and he's somewhat puzzled by the current valuation gap between major tech and drug issues. Intel and Cisco command double the valuation of pharmaceutical leaders such as Pfizer and Johnson & Johnson. "Drugs are a better business in the aggregate than technology," Buffett argues, citing higher returns on capital and greater product longevity, owing to patent protection. "If you look at the top 10 drug companies ranked by sales, the No. 2 or No. 3 company from the bottom is still earning a good return. It's hard to find a drug company that has failed," Buffett says. In tech, by contrast, "the outstanding ones are outstanding," but there are fewer of them, he says. Tech companies, he adds, are more sensitive to the economy.
An editorial comment I'll add is that investors are, of course, hoping for large earnings rebounds -- 40% or greater -- at tech giants, while drug companies are maintaining earnings growth rates in the mid-teens. Still, it's interesting that investors are putting a higher premium on hoped-for results than they are on the almost-assured results at drug makers.
Buffett admits in the interview that not selling Coca-Cola
In his typical candid and humble fashion, Buffett also admitted that not buying Wal-Mart
One sector that Buffett did imply looked attractive was banking, where multiples remain below market averages and returns on equity maintain a 20% level.
Despite the company's cash balance, Berkshire will not likely pay a dividend anytime soon. Not unless Buffett & Co. see little hope in reinvesting the cash for strong shareholder returns. A few years ago, Buffett projected that the stock market was likely to return about 6% annualized in the next 17 years, well below its historical average.