- By Region
The annual meeting of Berkshire Hathaway in Omaha, Nebraska, is as much like a family gathering as any corporate event hosting 35,000 people possibly can be.
The weekend has a predictable rhythm built around the two octogenarian men at its centre, Warren Buffett and Charlie Munger, that has changed little over time even as the numbers attending have swelled.
But this year, as Berkshire’s chairman and his longstanding partner sat on stage eating peanut brittle and patiently answering questions, there was a distinct undercurrent. Like relatives trying to gently prod a much loved uncle that it might, perhaps, be time to install running water in the house, one subject kept coming up – Berkshire’s lowly valuation.
Over the 47 years that Mr Buffett has steered Berkshire his record is unsurpassed. However, in the past two years the stock has hardly moved and has lagged behind the S&P 500 by 10 percentage points.
The billionaire investor did announce a stock buyback for the first time last year. Yet even though the company now has $38bn in cash and equivalents on hand, he only spent $67m, due to the strict criteria he has set for such purchases.
Mr Buffett will only buy shares when they are worth less than 1.1 times book value per share, or “dramatically undervalued”.
Questions from the crowd, three financial journalists, and three sell-side analysts returned to the subject from different angles time and again.
Would Mr Buffett consider changing his criteria for buybacks? Was the stock a good investment? The buyback had put a floor underneath the share price but was it also a ceiling?
Floors disappear when markets get chaotic, he said. “I do think it signals to a lot of people that they don’t have a lot to lose when they buy it slightly above 1.1 but they might have a lot to gain.”
When Jay Gelb of Barclays first asked about the possibility of a dividend, Mr Buffett did not answer. Asked again, he said that the stock had traded above intrinsic value in the past without a dividend.
“Putting the money to good use is a better value for shareholders than paying a dividend, Mr Buffett said.”
Mr Munger told Glenn Tongue of hedge fund T2 Partners that “over time Mr Market will treat Berkshire shareholders just fine,” and variations in the stock price over six or 12 months did not matter.
Others tried to discover Mr Buffett’s view of the value of Berkshire’s parts. The conglomerate is unique among public companies for the breadth of its operations, with 10 insurance companies, and another 69 commercial businesses, selling everything from milkshakes and newspapers to engagement rings and prefabricated homes.
Mr Buffett boasted that he owns eight companies that would be Fortune 500 members in their own right, and said that overall he would pay eight or nine times pre-tax earnings for the operating businesses.
The value in Berkshire broadly breaks down as a third each between insurance, the operating businesses, and the investment stakes in companies such as Coca-Cola and Wells Fargo.
Estimates for the intrinsic or fair value for the assets run from around $130,000 per A share to more than $160,000 at the optimistic end. At the current $122,000 share price, “you get Warren Buffett’s brain for free,” said David Winters of Wintergreen, a mutual fund.
Mr Buffett reiterated that over time his aim was for the stock to trade at its intrinsic value, and at one point felt it necessary to say that he actually did want the stock price to go up. As he is giving his stake to the Gates Foundation, “it will do more good in terms of its philanthropic purposes if it is trading at a higher price than lower price”.
But the underlying message, as ever, was: please be patient. Some shareholders were frustrated. “It would be good to know that if you had to sell, you would get fair value,” said one, after the meeting.
Others felt that Mr Buffett had the power to resolve the problem by grooming a successor in public, rather than simply insisting again that the board had a plan in place. Patrick Wolff, of Grandmaster Capital, a hedge fund, said that “given the otherwise strong outlook for Berkshire’s businesses, this may be why the share price is cheap. Buffett seems content for his successor to be announced the day he leaves the stage.”
Yet for many of the Berkshire faithful who flock to Omaha, Berkshire stock is something that they do not have to worry about, a secure part of their portfolio that balances out other investments and that they would not dream of selling.
Floyd May, a former oil industry executive from Texas who had driven up to Omaha in his motor home said that he was prepared to be patient with his A shares. “I’ll cash them in one day, or my grandchildren will.”