Warren Buffett Poised to Address Missed Deals With Cash Pile Growing
Warren Buffett tends to rejoice when he sees a company buying back underpriced shares. At his own Berkshire Hathaway Inc., which underperformed the stock market last year by the widest margin in a decade, an increase in repurchases might not be cause for celebration.
Buffett has found little success deploying Berkshire’s growing pile of cash. Its last big takeover, a $37.2 billion deal for Precision Castparts Corp., was more than three years ago. This year, the conglomerate was outbid for a tech company. Berkshire’s struggle to find well-priced takeovers led it to open another path for putting money to work: The company loosened its buyback policy almost two years ago, but has repurchased only $4.1 billion of its shares since then.
“We’re gradually getting more pessimistic about using our money,” Berkshire Vice Chairman Charlie Munger said in an interview last week. “It’s been a long time since we bought anything.”
Buybacks haven’t made much of a dent in Berkshire’s record $128 billion mountain of money either, weighing on its stock price because, as Buffett himself says, the funds earn “only a pittance.” Berkshire investors will be scouring Buffett’s annual letter to shareholders, set for release Saturday, for clues about his strategy after a year of missed deals and shares that rose at a slower pace than the S&P 500 Index — their worst underperformance since 2009.
“They just aren’t buying back a lot of stock, they aren’t putting a lot of money to work in public securities, they’re not buying portfolio companies outright,” Jim Shanahan, an analyst at Edward Jones, said in an interview. “The cash balance continues to grow.”
While 2019 wasn’t the year for an “elephant-sized acquisition,” Buffett was hunting. Berkshire reportedly passed on Tiffany & Co. but did make an offer for Tech Data Corp., ultimately losing out to private equity firm Apollo Global Management Inc.
The Omaha, Nebraska-based conglomerate also spent the last few months of the year plowing money into stocks new to its portfolio, taking stakes in Kroger Co. and Biogen Inc. Even that did little to chip away at Berkshire’s cash hoard, and it was still a net seller of stocks in the fourth quarter.
Buffett’s letter will be released alongside Berkshire’s annual report, which will include quarterly results for his sprawling company. Operating earnings probably rose in the last three months of 2019 from a year earlier, according to Meyer Shields, an analyst at Keefe, Bruyette & Woods. Berkshire’s net-income figure now factors in swings in the $220 billion stock portfolio, volatility that Buffett has cautioned investors to ignore.
As for acquisitions, Buffett for years has stressed patience, with prices for good businesses becoming “sky-high.” Last year, the S&P 500 Index notched its biggest gain since 2013. Waiting for markets to turn might be the wisest course for Buffett, according to Shields.
“The right thing to do is to do nothing if the potential acquisitions are overpriced,” Shields said in an interview.
As to whether the challenging environment for acquisitions could mean more Berkshire share buybacks in the future, Munger provided no guidance in last week’s interview, following the annual meeting of his Daily Journal Corp. in Los Angeles.
“Who can tell?” he said.
What Bloomberg Intelligence Says
“Fireworks on the corporate front in conjunction with Berkshire’s announcement of 4Q earnings are unlikely, in our view. Berkshire didn’t make any major acquisitions in the past three months, and share repurchases were probably modest in the quarter.”
–Matthew Palazola, senior analyst
While the Oracle of Omaha may address the frustrations of dealmaking and investing in 2019, Buffett often uses the letter as a platform to delve into a wider range of issues too, including the economy, politics and investment fees.
Here are some other topics that might come up in the letter:
Over the past year, a massive writedown, management changes and a regulatory probe at the packaged-food giant caused turmoil for Berkshire, its biggest shareholder. More recently, Kraft Heinz was downgraded to junk by some credit-rating companies, which has weighed on its stock.
Following a delay related to the problems at Kraft Heinz, Berkshire’s portion of its earnings are once again included in the conglomerate’s results. Buffett’s company carried its Kraft Heinz stake at a value of $13.8 billion on its balance sheet at the end of September, almost $4.7 billion more than the market price at the time. The conglomerate said it’ll continue to monitor the investment for impairment, but didn’t think it was required then.
“I have thought they have needed to write down the value of the asset for several quarters now,” Cathy Seifert, an analyst at CFRA Research, said in an interview. “I am surprised and dismayed that the carrying value has not been reconciled to reality.”
Buffett’s company famously keeps a relatively tight corporate staff, with just 26 employees in the office, so any reshuffling of duties tends to attract investor attention. Late last year, Berkshire named Todd Combs, who helps Buffett oversee investments, to run auto insurer Geico, in addition to his role managing at least $14 billion in stocks. While Buffett’s deputy worked at Progressive Corp. years ago, most of his career has been spent managing investments.
“That was a really surprising appointment,” said Shanahan of Edward Jones. “He just doesn’t have that kind of experience — not only running a large organization, but running an insurance company.”
Combs knows a lot about auto insurance so the appointment made sense, according to Munger. The auto insurer will increasingly need to figure out how to navigate changing technology, such as artificial intelligence for underwriting, Munger said.
Geico has also been facing pressure from rivals including Progressive, which sparked a question from a shareholder at last year’s annual meeting about how Geico stacked up to its competitor. Ajit Jain, vice chairman of insurance operations at Berkshire, said Geico has “significant” advantages in terms of controlling expenses, but that Progressive is better at managing losses.
“Geico is very aware of this disadvantage on the loss ratio that they are suffering, and they’re very focused on trying to bridge that gap as quickly as they can,” Jain said at the time.
Geico ended up tweaking its strategy last year, building out capabilities long championed by Progressive and Allstate Corp. Geico introduced a telematics offering, which connects cars and phone apps to track drivers’ habits.
Buffett’s letter always spurs questions about succession for the 89-year-old CEO and his 96-year-old business partner Munger. In 2018, Berkshire appointed two key lieutenants, Jain and Greg Abel, to its board, promotions that Buffett said at the time were movements toward succession.
Buffett hasn’t publicly named his successor, a fact that ramps up speculation around any public announcements. Many investors have been focusing on Abel, whose mandate includes overseeing all of Berkshire’s non-insurance businesses. Those responsibilities put him in charge of companies from the sprawling energy empire he led for years to retailers Dairy Queen and See’s Candies and apparel brands Fruit of the Loom and Brooks Sports.
Buffett has been carefully navigating the increasingly bifurcated U.S. political climate in recent years. While he campaigned for Hillary Clinton in 2016, he has yet to endorse a candidate in this year’s presidential race, though he has expressed support for Michael Bloomberg, who’s seeking the Democratic nomination. (Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)
Buffett’s 2019 letter contained a carefully worded section on how U.S. prosperity has been achieved in a bipartisan manner. He might take a similar approach this year.
“He may say something thinly veiled within the context of the American system and preserving the American system of capitalism,” CFRA’s Seifert said. “He runs a very large, globally interconnected company. It’s probably not a bad idea for him to be measured in what he says.”
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