Warren Buffett didn't become a legend of investing by making wild bets and hoping for the best. No sir, not at all. The Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) oracle built his wealth, bit by careful bit, by following a strict investing philosophy.
The first rule of Buffett's investing philosophy is simple: "Never lose money." And, like the classic Fight Club meme, rule two is just a reminder of the first rule.
I can't promise that you'll match his success, because there's much more to Buffett's investing success -- and he doesn't freely share all his secrets. Even if he did, most people simply lack the resources to study companies as deeply as he does, or the willpower to follow those wealth-building rules when a shiny but far too risky opportunity presents itself.
That being said, you gotta start somewhere. Follow the two principal rules to the best of your ability, and you'll be well on your way to your own Buffett-style investing adventures.
With that in mind, let me point out that Berkshire Hathaway doesn't own a significant stake in any mobile companies today. Unlike pretty much everybody these days, Buffett doesn't even own any Apple shares.
The one investment he has made in this sector doesn't move the needle at all for Berkshire Hathaway. The 15 million Verizon (NYSE:VZ) shares you'd find in Buffett's kitchen pantry only add up to 0.37% of the telecom's market value. The $33 million in annual dividend payouts from that investment aren't even a rounding error in Berkshire's $19.9 billion of trailing net income.
That being said, one stock in the mobile industry might actually fit within Buffett's strict portfolio-building rules. Say hello to cell tower owner and operator American Tower (NYSE:AMT).
First, let's look at the reasons why American Tower doesn't necessarily jump out as an obvious Buffett buy.
Why I might be wrong
Unlike Verizon, American Tower doesn't offer a super-generous dividend yield. Despite doing business as a real estate investment trust, which means paying out at least 90% of pre-tax earnings in the form of regular dividends, the company only offers a 1.7% yield today. Verizon's yield is a much more robust 4.4%.
Then there's the fact that American Tower is a much smaller operation than Verizon, despite its nationwide market and increasingly global footprint. You and I might not care much about the ownership stakes we're building in multibillion-dollar companies, but these concerns make a difference when you operate on the scale that Warren Buffett does.
Based on Berkshire's relatively small Verizon investment, Buffett's proportional interest covers $37 million of Big Red's annual net income and $125 million of its operating cash flow. To match the earnings power of that 0.37% Verizon stake, Berkshire would have to build a 4.6% position in American Tower. To reach the Verizon investment's level of cash flow, Buffett would need a 5.9% stake in American Tower.
And again, if the Verizon holding isn't moving Berkshire's earnings needle very far, the company would presumably want a much larger return on a serious American Tower play. Merely matching the Verizon position's operating cash flow would require a $2.3 billion investment in American Tower. That looks very inefficient next to the $750 million value of Berkshire's Verizon shares.
To put that discussion in perspective, the largest shareholder in American Tower today is investment firm BlackRock, holding a 6.5% interest in the company. In other words, any significant interest that Buffett takes in this stock will almost surely make him the largest shareholder.
If American Tower's board of directors is feeling insecure that day, they might throw up all sorts of takeover defense shields. Berkshire buyouts are often excellent exit plans for current management and investors, but even Warren Buffett is not automatically welcomed with open arms into every boardroom.
Stop hitting yourself!
Alright, there are some very good reasons why Warren Buffett hasn't dug into American Tower yet -- and why he might never go there at all.
So here's why I think he could overcome these concerns, and very well might make his first serious move into the mobile market through a back door named American Tower.
First, Warren Buffett sure likes generous dividend payers, but it's far from his favorite business metric. Of the 47 public companies Berkshire Hathaway holds investments in right now, 14 stocks don't pay any dividends at all. Many others offer no more than a token payout.
In the end, American Tower's yield at current prices would qualify as the 20th richest among those 47 Berkshire holdings. Squarely middle of the pack. Nothing to see here, move along.
As for the large investment required before American Tower starts making real waves inside Berkshire, well, that hasn't stopped the Oracle of Omaha before. He didn't blink twice before taking home all of Burlington Northern Santa Fe for $26 billion, or a 50% slice of the $23 billion Heinz deal. Investing a couple billion dollars on a fantastic wireless tower operator? Child's play.
And here's where we get to the fun part. You see, Buffett famously loves to buy great companies at a fair price, rather than decent businesses at a great price. Those deep discounts are often there for good reason, adding risk that can come back and destroy that fantastic value in a few years.
American Tower is most definitely a great company. Its 73% gross margin puts both Verizon and arch rival Crown Castle International (NYSE:CCI) to shame. The story is the same in the operating margin line. American Tower's 38% operating margin far exceeds Verizon's at 16% and Crown Castle's at 27%.
Furthermore, if you want revenue growth, you'll prefer the tower operators over Verizon any day of the week -- and American Tower is the best of breed in a generally attractive industry:
How about earnings growth? See for yourself:
I could go on, but let's boil it down to a simple statement instead. American Tower's most important business metrics show a combination of strong growth and high quality that should make Warren Buffett drool.
Furthermore, American Tower's tower sites are either fully owned or under multi-decade lease agreements. This adds great long-term stability to the business. Meanwhile, the company is busy expanding into high-growth markets overseas with a balanced combination of buyouts and new construction. All of this is happening right at the start of the Internet of Things era, which is likely to drive great demand for wireless data services for decades to come.
So we're looking at an incredibly stable business model with strong margins and wide-open growth prospects. To put it in words any Buffett aficionado would recognize, American Tower could be run by a ham sandwich without losing a step.
Long story short, in case you're the kind that merrily skips straight to the last chapter of War and Peace: I wouldn't be surprised to see Warren Buffett taking a large position in American Tower. It's exactly the kind of low-risk business with great prospects and simple operations that he prefers.