Financial Freedom
If I Ran Berkshire Hathaway: (BRK B) (BRK A)
Thesis:
Berkshire Hathaway (NYSE: Stock Symbol BRK.A) (NYSE: Stock Symbol BRK.B) can transition towards a bright future. The company needs a dividend to make it competitive with other investment alternatives. It needs a leader who can engage with the investing community and attract institutions for a higher share price. Why should investors buy Berkshire’s stock if Warren Buffett keeps recommending the Vanguard S&P 500 index fund?
Summary:
- Dividend is a win-win for Berkshire and shareholders. Shares have 20% upside with a dividend and buyback.
- Buffett should encourage investment and stop advocating for index funds. 1.5% dividend is overdue.
- Evolution of GEICO for the self-driving age.
Dividend:
Berkshire Hathaway should implement a dividend of at least 1.5%.
In today’s low interest rate environment, income is quite important. Not having a dividend discourages income investors, and Berkshire shares would trade higher with a dividend.
Berkshire Hathaway should implement a dividend as soon as possible. I suggest a $1,000 quarterly dividend on a share price ~$255,000. On 1.64M shares, this equates to a quarterly cost of $1.68B per quarter. And ~1.56% yield. This is the minimum dividend that the company should pay.
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Benefits
This should have been done years ago. This is a win-win for investors and for Berkshire Hathaway. In today’s low yield environment, not having a dividend makes the shares much less competitive.
Yield starved investors have been reaching for yield in dangerous areas like BDCs and High Yield bond funds. This would help current investors and also attract new investors to Berkshire. I believe this will result in a premium for Berkshire and a higher share price both now and in the future.
With a prudent buyback policy and a competitive dividend, there is no reason why Berkshire couldn’t trade at 2x book value. This would equate to a share price of ~$365,000.
Rationale
The rationale for not instituting a dividend has been that Mr. Buffett can find investment opportunities that greatly outperform the market. This has been the case in the past. However, this is no longer a safe assumption. The market is quite expensive, and there are few undervalued situations in the $116B category in which Mr. Buffett is looking. Additionally, if he finds a deal he wishes to pursue, Berkshire could finance the transaction with debt.
Attracting Investors
Investors see Berkshire as a surrogate for the S&P 500 (NYSE ETF : SPY) and or large-cap mutual fund or money manager. In the past, the performance attracted plenty of investors on its own. That is no longer the case.
The shares have only beaten the S&P 500 by a small margin over the past few years. To most investors, investing in Berkshire Hathaway is less attractive now. Paying a dividend would go a long way to reward investors and attract institutions. I believe this move alone would create appreciation of at least 10-12% in the next six months.
Post-Buffett
From Buffett:
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
This doesn’t strike me as the best way to motivate the 376,000 Berkshire Hathaway employees.
More than a few shareholders have sold their companies to Berkshire and now have their life savings invested in the stock. Like the family of Rose Blumkin and others. The share price is very important to them.
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Berkshire Hathaway Stock Returns
As most investors realize, Mr. Buffett is no longer able to outperform the indexes by the same margin as he used to. This is due to the size of his holdings. Therefore, a shareholder-friendly policy would help.
Mr. Buffett is still one of the best investors of our time. However, his ability to generate alpha seems to be declining.
“By some calculations, his alpha is now close to zero.”
“Warren Buffett had a phenomenal annual alpha of 19% between 1956 and 1968. Our current analysis shows that his alpha was more than 30% between 1977 and 1981. During the 80’s and 90’s, his annual alpha declined but was still better than 12%. For the ten years leading to mid-2003, his annual alpha stayed around 12% per year. Since then, it started a steep decline; by the end of 2004 it was (still a respectable) 6% per year. Between 2005 and 2008 Buffett’s alpha averaged only 3% per year. Finally, in the ten years ending in 2009, it went virtually to zero.”
Lunch with Warren Buffett
Warren Buffett charity lunch sells for $2.68 million.
Yes, it’s for charity. However, the bidding by hedge fund managers and wealthy foreigners to have lunch with Mr. Buffett seems to exclude most investors. The typical winners of this lunch seem to be wealthy hedge fund managers.
I would encourage Mr. Buffett to open the lunch up to a raffle format with something like a $20 entry fee. All Berkshire employees would automatically be entered for free. Instead of educating one wealthy hedge fund manager over a $2.68M lunch, Mr. Buffett can raise money for charity and help educate regular investors and employees.
A win-win.
GEICO
We are looking at a new age in car insurance. One way or another, self-driving cars will threaten or destroy the GEICO business. I would begin taking these threats seriously so that the company can transition in the best way possible. Be it through new insurance lines, acquisitions, or another route. GEICO is particularly vulnerable to this disruption and it is an issue for shareholders. Sooner or later, this will need to be addressed by Berkshire.
Conclusion
Berkshire Hathaway is just one of many large cap alternatives for investors. They can invest with an active manager or an index fund. In order to attract more institutions and a higher share price, the company should pay a dividend and be open to share buybacks. The company needs to begin the transition to a new era.
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