Warren Buffett underlined his commitment to buy back shares of Berkshire Hathaway to the tens of thousands of shareholders assembled at the company’s annual meeting in Omaha on Saturday, calling recent repurchases “nothing like my ambitions”.
The so-called Oracle of Omaha, who has amassed billions of dollars of personal wealth over his more than five decade career at Berkshire Hathaway (BRK/A) (BRK/B), has overseen a vast increase in share buybacks by the sprawling conglomerate although the repurchase programme remains a small portion of the company’s $114bn cash pile.
“Whether we have $100bn or $200bn . . . or $50bn would not make a difference in our approach to repurchases of shares,” he said. “When our stock gets cheap relative to its intrinsic value, we wouldn’t hesitate.”
The company repurchased $1.7bn of its own stock in the first three months of the year, a steep acceleration from the $1.3bn it bought in the entirety of 2018. The pace of share repurchases at the end of last year disappointed analysts and investors, with some questioning the signal it sent on Berkshire’s intention to buy back shares over the coming years.
Charlie Munger, the company’s vice-chairman who shared the stage in Omaha with Mr Buffett, added that he believed Berkshire would get “a little more liberal in repurchasing shares.”
The pledge came as the duo faced critical questioning from shareholders, in a record crowd that included Apple (AAPL) chief executive Tim Cook, about embattled investments in Wells Fargo (WFC) and Kraft Heinz (KHC), as well as its 3G private equity partner, and its more recent Amazon (AMZN) purchase as not being a “value” investment.
Mr Buffett began the meeting by opening a bottle of Coca-Cola, one of the long-held Berkshire investments, but swiftly moved on from his usual folksy greetings to address the issue of a lack of accounting from the troubled Kraft Heinz business in which Berkshire is the largest investor.
He acknowledged that Berkshire had overpaid for its investment in the tie-up of Kraft with Heinz. “The Heinz part of the transaction, when we owned half of Heinz, we paid an appropriate price.”
“We paid too much money for Kraft. To some extent our own actions had driven up the prices,” he said.
In response to a question about whether Berkshire had changed its view about the long-term potential of Kraft Heinz, he did not answer directly but said the group had misjudged the pressure on profit margins from retailers of its products.
“We did underestimate, not what the consumer is doing, but what the retailer is. At See’s Candies we sell directly to the consumer but at Kraft Heinz there are intermediaries.”
Berkshire’s partnership with 3G Capital has drawn criticism as a result of the difficulties faced by the Kraft Heinz business since the 2015 merger of the two companies. Mr Buffett again defended its partnership agreement, which he said was written on one page. He said it was possible Berkshire would do another deal with the group.
“Jorge Paulo [Lemann, 3G co-founder] is a good friend of mine. I think he’s a marvellous human being and I’m pleased we are partners. It’s not at all inconceivable that we could be partners in some other transaction in the future,” he said.
“They have more of a taste for leverage than we do and they have more of a taste for paying up. But in certain situations they would be way better operators than we would.”
While the company last week agreed to invest $10bn into oil and gas producer Occidental Petroleum (OXY) to back its $55bn hostile takeover of rival Anadarko Petroleum, it has not been able to clinch a significant takeover of a company in more than three years. It has instead pumped money into its stock portfolio — now valued at $192bn — as well as its own shares.
Berkshire’s stake in Apple was worth nearly $49bn at the end of March, with its holdings in Bank of America (BAC) and Wells Fargo valued at $25bn and $21bn, respectively.
The company has long capped its investments in individual stocks at 10 per cent, but Mr Buffett indicated that could soon shift as the Federal Reserve considers relaxing regulations that govern the ownership of banks.
“If the Fed should change its rules, there will be companies where we drift up over 10 per cent simply because they’re repurchasing shares,” he said. “If we like 9.5 per cent of a company, we’d like 15 per cent better.”
While Messrs Buffett and Munger, aged 88 and 95 respectively, reigned over the proceedings as usual, the pair highlighted the work of top executives Ajit Jain and Greg Abel, who are seen as potential successors. They were each promoted last year to vice-chairman rank, and each run the Berkshire insurance and non-insurance operations.
Mr Buffett passed the microphone to Mr Jain, who rarely speaks publicly, to answer a question from the floor about underwriting in the insurance business while Mr Abel fielded questions on the energy business. Mr Buffett said he would entertain a request for Berkshire executives to appear on the stage at future meetings.
“You could not have two better operating managers than Greg and Ajit. They know the businesses better. You are absolutely invited to ask questions to be directed over to them in this meeting. This format will not be around forever and if it’s better to get them up on the stage we’re happy to do it.”
Apple, Amazon and value investing
Investors were surprised this week when Mr Buffett disclosed Berkshire had taken a stake in ecommerce behemoth Amazon. The shares were purchased by one of Mr Buffett’s two investment protégés at Berkshire, Todd Combs and Ted Weschler, although Berkshire has not said which.
The investment raised questions from at least one shareholder on Saturday, who asked if the company’s 70-year long investment philosophy was changing. While Apple has shown a tremendous ability to generate cash and profits — a fit for Berkshire — Amazon has had a far patchier record.
Messrs Buffett and Munger noted they had missed many great investment opportunities and that Messrs Combs and Mr Weschler would help the company identify stocks to buy.
“Considerations are identical when you buy Amazon versus some, say, bank stock that looks cheap statistically against book value,” Mr Buffett said, before going on to cite a proverb from Aesop regarding a bird in the hand versus one in the bush.
Another missed investment opportunity caused laughs in the arena. Mr Munger quipped that he felt like a “horse’s ass” for not investing in Google-owner Alphabet (GOOGL). Buffett added: “He’s saying we blew it.”
Threats to capitalism
Mr Buffett addressed the notion of the rise of socialism in America and his support for Democratic policies.
“I’m a card-carrying capitalist but I believe we wouldn’t be sitting here except for the market system and the rule of law . . . embodied in this country.”
“You don’t have to worry about me changing in that manner. But capitalism does involve regulation, it involves taking care of people left behind.”
Activists taking aim at Berkshire
“In the end Berkshire should prove itself over time. There are no perpetuities and it needs to deserve to be continued in its present form. It has a lot of attributes that are maximised by being in one entity.”
Berkshire’s insurance business
“It’s worth a lot of money. We think it is worth more to us and we think it’s worth more while lodged within Berkshire. We’d have a very high value on that.”
Berkshire’s $10bn Occidental investment
“I don’t think the Occidental transaction will be the last one we do. There may be one in a month. There may be one three or four years from now. It won’t be identical.”
“If somebody wants a lot of certain money for a deal, they have seen I can get a call on Friday afternoon and they can make a date with me on Saturday, and on Sunday it’s done. And they absolutely know they have $10bn and we won’t tell them how to structure their transaction.”
Brexit and dealmaking in the UK
“I’m not an Englishman but I have a feeling it was a mistake to vote to leave. But it [Brexit] doesn’t destroy my appetite in the least for making a very large acquisition in the UK.”
Investing across borders
“We do hear about some. We do have the problem they [deals] have got to be sizeable. If we do a $1bn acquisition and it makes $100m or thereabouts pre-tax, $80m after-tax, if we really know the business . . . it’s nice to add $80m to $25bn, but you can’t afford to spend lots of time doing that.”