When I was asked to write this piece for our ongoing series on Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) annual meeting, I struggled to come up with seven legitimate reasons to sell the Omaha, Neb.-based company. After thinking it over, however, I believe I've drawn up a list of factors that fits the bill. To be clear, there's little about Berkshire that leads me to believe it's a "sell" right now. But that's not to say this won't change in the not-too-distant future.
1. Warren Buffett
If Buffett had it his way, he'd probably run Berkshire forever. But he doesn't. And in last year's annual letter to shareholders, the Oracle of Omaha assured investors that the board of directors has not only picked a successor ("an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire") but that they've identified two "superb backup candidates" as well.
This may be so, but the fact remains that Berkshire won't be the same without Buffett. Aside from his ethereal ability to grow and manage an increasingly massive conglomerate, Buffett has become a magnate for deals. When Solomon Brothers fell on hard times, who'd they call? When Long-Term Capital Management nearly imploded, Buffett was among the first to offer assistance. And when Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC) needed to reassure the market of their respective solvencies, it was Buffett who came to the rescue.
The point is that people go to Berkshire because of Buffett. This is equally true for companies that are looking to sell as it is for companies like Goldman and Bank of America that simply need a temporary stamp of approval. And, in return, Buffett ensures that Berkshire is more than adequately compensated for any offer of assistance.
Success can be both a blessing and a curse. The blessing comes on the way up, as companies establish themselves, gain momentum, and grow at spectacular rates of speed. But at some point, they become so large that the growth rate necessarily decelerates. We've seen this with the greatest of American companies recently, including Chipotle and Apple (NASDAQ:AAPL). And Berkshire is no exception.
What started as a modest textile business has grown into one of the largest industrial conglomerates in the world. It's the fifth largest publicly traded company in the United States by market capitalization, behind only ExxonMobil, Apple, Google, and Microsoft, respectively. In his most recent letter to shareholders, Buffett acknowledged the pressure this puts on Berkshire's growth through acquisition strategy: "Because of our present size, making acquisitions that are both meaningful and sensible is now more difficult than it has been during most of our years."
Will Berkshire continue to grow? Yes. Will it continue to do so at the same speed? No. It's just an arithmetic reality that its growth rate will plateau.
3. Recent performance
The curse of size appears already to be exerting its unwelcome impact on Berkshire's returns. Buffett began his 2012 letter to shareholders discussing just this:
When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar, in terms of the comparison we present on the facing page.
But subpar it was. For the ninth time in 48 years, Berkshire's percentage increase in book value was less than the S&P's percentage gain (a calculation that includes dividends as well as price appreciation). In eight of those nine years, it should be noted, the S&P had a gain of 15% or more. We do better when the wind is in our face.
To date, we've never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch. (The record is on page 103.) But the S&P has now had gains in each of the last four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five year wins will end.
Given that Buffett is the poster child of value investing, one has wonder whether he, himself, would own, much less purchase, Berkshire stock at its current valuation. According to Yahoo! Finance, it trades for 17.93 times earnings, almost precisely in line with the broader market's 17.94 multiple. In addition, the company trades for 1.38 times book value. While that's by no means outrageous, it's among Berkshire's highest multiples since the end of 2008.
5. It doesn't pay a dividend
The fact that Berkshire hasn't paid a dividend during Buffett's tenure should neither come as a surprise to shareholders, nor should they lament the fact. "Over Berkshire's history -- admittedly one that won't come close to being repeated -- the sell-off policy [under which shareholders sell stock for cash as opposed to receive a dividend] would have produced results for shareholders dramatically superior to the dividend policy," Buffett wrote in his 2012 annual letter to shareholders. And given his prowess at capital allocation, there's little reason to doubt this.
But as I've already discussed, Buffett won't be around forever, and an anti-dividend policy left in less capable hands could easily produce a less favorable outcome. This isn't to say that Buffett's successor won't break with tradition -- for what it's worth, we've seen this at Apple since Steve Jobs passed away. It can't be denied, however, that it's always harder to break with precedent than to go along with it.
6. Reallocating your portfolio
Philip Fisher, another famous value investor (and one that Buffett greatly admired), once said that the best time to sell a stock is "almost never." One exception to this rule is if there's a better opportunity. Getting close to retirement and want to reallocate toward bonds? Want regular dividend payments? Everybody's portfolio should be structured to their own individualized needs. While Berkshire has been a great investment over the years, that doesn't necessarily mean it's the right one for every investor right now.
7. You have a better use for your money
Investing is not an end in itself; it is rather a means to an end. With this in mind, there are certain realities in life that call for large amounts of capital. Buying a home. Paying for a child's college tuition. Medical expenses. Investing doesn't occur in a vacuum. Consequently, if you have a use for your money that you deem more worthy, then even Buffett would likely condone your decision to sell Berkshire.
Foolish bottom line
Make no mistake about it: Berkshire is a great company, and particularly so long as Warren Buffett is manning the ship. With this in mind, to repeat what I said at the beginning, there's little about Berkshire that leads me to believe it's a "sell" right now. But that's not to say this won't change.
Heading to Omaha
On May 4, Berkshire Hathaway will be holding its epic annual meeting in Omaha, and the Fool will be there to bring you everything you need to know from this "Woodstock for Capitalists" Simply click here to follow along with all of the Fool's coverage.
John Maxfield owns shares of Bank of America and Apple. The Motley Fool recommends Apple, Berkshire Hathaway, Chipotle Mexican Grill, Goldman Sachs, and Google and owns shares of Apple, Bank of America, Berkshire Hathaway, Chipotle Mexican Grill, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.