Berkshire's stock sales have been bigger news this year than it's buys. What gives?
Warren Buffett's reputation as a stock picker is nearly unmatched. Over the past half-century, his knack for investing in, as he says, "great businesses at fair prices" has been amazing.
Long-term investors in his Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) over that time have been rewarded in a life-changing way. After all, it would have cost you around $1,500 to buy five of the company's "A" shares in 1980. Today, you'd be a millionaire if you still held those five shares. A significant amount of that value is a direct product of Buffett's skill at investing Berkshire's cash flows into great stocks, and then holding them for years.
Chart source: Author.
The thing is, over the past few years Buffett's biggest stock picks haven't exactly produced stellar returns, and the company has dedicated a lot more cash to acquisitions than it has to stocks.
Is the Oracle of Omaha moving away from stocks? Let's take a closer look.
Historical impact of stock investments to Berkshire's share value
Berkshire Hathaway's current market capitalization -- the value of its shares -- is $332 billion. Through June, Berkshire's equity portfolio was worth $110.7 billion, good for about one-third of the company's per-share value.
Frankly, it's hard to understate just how much value Buffett has created for with his stock-picking prowess. From the 2014 annual letter:
Two of the biggest winners on this list, American Express & Co. and The Coca-Cola Company, cost Berkshire less than $2.6 billion to buy, and are worth more than $30 billion now. It gets better. Combined, those two companies will pay Berkshire more than $700 million in dividend payments in 2015. At that rate, plus likely increases AmEx and Coke dividends over the next three years should exceed what Berkshire paid for their stocks.
But the times are a-changin'
Over the past five years, there's been a significant shift in where Berkshire's excess capital has gone. At the end of 2008, Berkshire's equity portfolio was worth $49 billion. That means it has gained about $62 billion since the end of '08, based on the $110.7 billion value at the end of the second quarter.
That's a significant gain in value, but over the same period of time, Buffett has invested significantly more money in acquisitions:
- $27 billion for BNSF Railways (2009).
- $9 billion for Lubrizol (2011).
- $5.6 billion for NV Energy (2013).
- $13 billion for Heinz (2013).
- Likely several billion for Van Tuyl Auto Group (undisclosed but a $8 billion revenue company in 2014).
- $10 billion for Heinz's acquisition of Kraft, creating Kraft Heinz Co., of which Berkshire is a significant owner (2015).
- $37.2 billion in cash and debt to acquire Precision Castparts -- making it Berkshire's largest acquisition yet (2015).
Added together, that's $102 billion in major acquisitions, not including Van Tuyl.
Compare those numbers with Berkshire's major stock investments over that time:
- $7 billion for ConocoPhillips, which Buffett called an "error of commission" and would be sold off at a loss partly to fund the BNSF acquisition.
- $13 billion-plus for International Business Machines, so far at a loss, as IBM has struggled to adapt to a changing tech environment.
- $3.7 billion for ExxonMobil shares in 2013, which would be sold in late 2014 to raise cash for acquisitions.
- $5.2 billion in new shares of Wells Fargo & Co.
- $2.9 billion in Wal-Mart Stores..
- $1.4 billion in Phillips 66 shares traded for its specialty products business.
- $4.7 billion in Procter & Gamble shares traded for the Duracell battery business.
The roughly $21 billion invested in IBM, Wells Fargo, and Wal-Mart make up essentially all of the new money invested in stocks since 2009, and several of Buffett's biggest moves didn't pan out at all. Further, the $6 billion-plus in stocks traded to Phillips 66 and Procter & Gamble decreased the stock portfolio and added to the operating business.
Is Buffett giving up on stocks?
I know it's hard to look at the data and not conclude that he isn't. Over the past six years, Berkshire's market capitalization has gone up $184 billion, while the value of the stock portfolio has only increased $62 billion over that time. In other words, per-share value of the company's operating businesses has grown twice as much as the value of Berkshire's vaunted stock portfolio.
Here's the thing: Buffett has been telling us for years that this was going to happen. From the 2008 annual letter to shareholders (emphasis mine):
Over time, we need to make decent gains in each area [stock value and operating earnings] if we are to increase Berkshire's intrinsic value at an acceptable rate. Going forward, however, our focus will be on the earnings segment, just as it has been for several decades. We like buying underpriced securities, but we like buying fairly priced operating businesses even more.
But I don't think it's fair to say Buffett is giving up on stocks.
It's not about stocks. It's about Berkshire
One could say it's a case of no good deed going unpunished that Buffett is being forced to look for acquisitions to get the best returns from Berkshire's enormous cash flows. In other words, he used to be able to shop on the bargain aisle. Now he's buying whole stores. That's what happens when you become one of the largest companies in America.
The Berkshire stock portfolio may be less important today than it was in the past, but that doesn't mean it's worthless -- far from it, especially with Ted Weschler and Todd Combs now working with Buffett to invest in stocks. The company may not move the needle like it did in years past, but it will remain an important part of shareholder value at Berkshire for years to come.
