Warren Buffett’s annual shareholder letter will be closely watched to see what the CEO of Berkshire Hathaway has to say about a range of issues including succession, stock repurchases, dividends, the acquisition environment, the company’s lagging stock price, and its move to pare its longtime equity holding in Wells Fargo.
The letter is due to be posted on Berkshire’s website around 8 a.m. Eastern time this coming Saturday, Feb. 22.
Succession is on the minds of Berkshire holders with Buffett turning 90 in August, but he has said little about it other than that the next CEO would come from within the company. Berkshire’s class A shares (BRK/A) are off 0.5%, at $338,430, in recent trading. Berkshire’s class B shares (BRK/B) are also off 0.5%, at $225.65.
In our most recent cover story, Barron’s pegged Greg Abel as the favorite, with Todd Combs as a potential contender. Abel, 57, is a Berkshire vice chairman and chairman of Berkshire Hathaway Energy, a big utility business. Combs, 49, is a rising star who has run a portion of Berkshire’s equity portfolio for nine years and was named CEO of Geico, Berkshire’s valuable auto-insurance business, at the end of last year.
Investors also are eager to hear Buffett’s thoughts on share repurchases, which have been modest since he and Berkshire Vice Chairman Charlie Munger got expanded authority to buy back stock in mid-2018. Berkshire bought back $2.8 billion of stock in the first three quarters of 2019, a small amount relative to the company’s $554 billion market value. Buffett wrote in last year’s annual report that Berkshire would be a “significant repurchaser” of its shares, but there has been no evidence of that yet.
Wall Street also will be interested to see whether Buffett touches on the lack of a dividend at Berkshire. The company’s pile of cash and short-term marketable securities keeps growing—the total was $128 billion at the end of the third quarter—and Buffett is finding no major acquisitions. He also was relatively inactive in the equity market last year, aside from a $10 billion purchase of attractively price Occidental Petroleum (OXY) preferred stock carrying an 8% dividend yield. Many investors would like to see a dividend of around 2% at Berkshire given its earnings power of more than $25 billion annually and its cash hoard.
Buffett lamented the difficult environment for purchasing businesses in his annual letter last year, and nothing much turned up in 2019. “Prices are sky-high for businesses possessing decent long-term prospects,” he wrote. Buffett may have more to say on the acquisition environment in the new letter.
Buffett normally doesn’t discuss Berkshire’s stock price, but it lagged the S&P 500 index (.SPX) in 2019 by one of the widest annual margins during his 55-year tenure running the company. Berkshire gained 11% last year, against a 31.5% total return for the S&P 500. Berkshire now trades for a modest 1.3 times our projection of its 2019 year-end book value of around $263,000 per class A share.
Buffett’s long affection for Wells Fargo (WFC) is waning. Berkshire continued to reduce its stake in the big bank during the fourth quarter. It sold 55.2 million shares of the San Francisco-based company in the period, bringing its stake to 323.2 million shares. Berkshire cut its interest in Wells Fargo by 28% in 2019 and now owns less than 8% of the bank.
Buffett has held a sizable position in Wells Fargo since 1990, and he called Wells Fargo one of his “Big Four” investments, along with Coca-Cola (KO), American Express (AXP), and IBM (IBM), in his 2015 letter. The IBM holding is gone.
It’s unclear why Buffett has pared the Wells Fargo stake, but Munger last week expressed displeasure with the decision of the bank’s new CEO, Charles Scharf, to live in New York and commute to San Francisco. “That’s outrageous,” Munger said, according to Bloomberg. “Anybody should move for a big job like that.”
Bank of America (BAC) now is Buffett’s favorite bank, with Berkshire holding just over a 10% stake worth $31 billion, second only to Berkshire’s $78 billion position in Apple. Berkshire reduced its stake in Goldman Sachs Group (GS) by about a third in the fourth quarter, and now holds 12 million shares of the company. That’s notable given that Goldman has laid out a plan to boost its returns and diversify its business.
Berkshire has a large exposure to the financial sector, holding stakes in most of the 10 leading U.S. banks, with Citigroup (C) and Morgan Stanley (MS) being the only major exceptions.
It would be nice to see Buffett divulge the performance of Berkshire’s equity portfolio. It had been trailing the market prior during a multiyear period before 2019, when Apple’s surge gave it a big bump. Berkshire watchers would like to know the investment performance of Combs and Ted Weschler, who together run about $30 billion of the $242 billion equity portfolio. Buffett said in a CNBC interview a year ago that they were a “tiny bit” behind the market during their tenure at Berkshire and that both “have done better than I have.”
Investors also will be poring through the annual report for information on key Berkshire subsidiaries, notably Geico, Burlington Northern Santa Fe, and Berkshire Hathaway Energy.
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