Every company holds an annual meeting, but few compare toBerkshire Hathaway’s (NYSE:BRK-A)(NYSE:BRK-B). Warren Buffett and Charlie Munger spend hours giving frank answers to questions about topics ranging from Berkshire’s many businesses to their views on politics, making it one of the only meetings that even non-shareholders tune into.
There were five things that stood out at the annual meeting as topics every Berkshire shareholder and follower should know about.
1. Berkshire’s investment edge is enduring
There are many investment companies that can write billion-dollar checks, but few can lend credibility quite like Berkshire. During the 2008 financial crisis and thereafter, companies including Goldman Sachs, Bank of America, and even Harley-Davidson turned to Buffett to get access to cash and credibility at a time when they needed it most. Buffett said that he thinks of this as an advantage that rests with Berkshire, not his own personal brand, saying that, “I think the reputation of Berkshire being a good home for companies… I don’t think that’s dependent on me and Charlie.”
Berkshire’s practice of being a buy-and-hold investor makes it a better fit for acquiring privately held companies, where the sellers may view their legacy as being more important than getting the highest possible price.
Buffett noted that Ted Weschler and Todd Combs, portfolio managers who oversee more than $25 billion of capital for Berkshire, have already been instrumental in sourcing and negotiating deals on the company’s behalf.
Image source: The Motley Fool.
2. Berkshire’s insurance moat is widening
Though Berkshire’s non-insurance operating businesses now make up the majority of its earnings power, its insurance companies are more than a rounding error. In fact, of all its businesses, its insurers may have the most formidable moat to insulate them from competition.
Buffett said that Berkshire is in a better position than any other insurer when it comes to digesting large insurance losses, making it a go-to place for large and complex risks. This was proven true last year when Berkshire signed a $10.2 billion reinsurance deal with AIG. Buffett called that policy “a world’s record and one we won’t come close to repeating” in his most recent letter to shareholders.
But Berkshire’s competitive advantage in insurance isn’t limited to the big and unusual.At the annual meeting, the Oracle of Omaha described GEICO as one of its best insurance businesses, saying that:
GEICO is a jewel. It’s an incredible company. It’s saving its customers probably $4 [billion] to $5 billion a year against what they would be paying otherwise.
He later added that approximately 13% of American households have a policy with GEICO, up from less than 3% of households when Berkshire acquired the company in 1995. In typical fashion, Munger succinctly described GEICO as “never really bad and now it’s really good.”
3. Berkshire is sticking with Wells Fargo
Buffett and Munger have held up Wells Fargo(NYSE:WFC) as one of the greatest banks in the country ever since Berkshire took a stake back in 1989. Berkshire owns about 10% of the bank often described as “America’s largest community bank,” making it the second-largest holding in the holding company’s stock portfolio.
But Wells Fargo’s recent scandals — opening accounts customers didn’t authorize, charging for insurance its customers didn’t need, among others — have tarnished its reputation. Many investors worry that the bank’s earnings power is diminished, given that its fee-based businesses that fueled its outsize profits were at the center of the scandals. Buffett doesn’t view Wells as being any worse after the scandals than before. In fact, he argued that it may be better off when the dust finally settles.
“I see no reason to think that Wells Fargo — going forward — is other than a very, very large well-run bank that had an episode of its history. GEICO came out stronger, American Express came out stronger,” Buffett said, referring to each company’s performance after large missteps in their corporate histories.
“All the big banks have had troubles of one sort or another and I see no reason why Wells Fargo as a company, from both an investment standpoint and a moral standpoint going forward, is in any way inferior to the other big banks with which it competes,” he said.
Of course, investors may dismiss Buffett’s upbeat tone as talking his book. Berkshire has a $28 billion stake in the San Francisco-based institution, but given he’sone of thegreatest bank-stock investors, ignoring his opinion outright would be folly.
4. Shareholders shouldn’t count on a dividend
Berkshire ended the first quarter with $108.6 billion in cash. Buffett prefers to keep $20 billion in cash around as a “rainy day fund” forinsurance losses, implying that his company had about $88.6 billion of excess cash it could use for acquisitions, stock buybacks, or dividends. When asked at the annual meeting whether Berkshire had any plans to start distributing cash to shareholders, Buffett said that if it were to happen, he would prefer stock buybacks to dividends.
The legendary investor noted that shareholders had previously indicated they weren’t in a hurry to collect dividend checks. He said that “the B shares voted 47 to 1 against” dividends when it was put up for a vote at the annual meeting just a few years ago.
Buffett doesn’t expect that cash will sit around forever, adding that “we won’t always be in a world of low interest rates or high private-market prices” for businesses.
5. Berkshire loves the boring and unremarkable
One of the most important questions at the annual meeting came from an 8 year old, who asked about Berkshire’s changing investment philosophy. She pointed out that Buffett historically acquired businesses that didn’t need continuous large investments to grow. In the last decade, though, Buffett has made major investments in capital-intensive businesses, including railroad and utilities companies.
Buffett characterized the change as a simple matter of scale — there aren’t many large capital-light businesses at prices Berkshire finds attractive. Munger said the utilities and railroad businesses produced “very satisfactory” returns, adding that he wished Berkshire “had two more just like them.” Buffett agreed.
Though the utilities and railroad businesses are unlikely to produce extraordinary results, they allow Berkshire to put billions of dollars to work at a nearly guaranteed rate of return. Compared to the alternative — hoarding excess cash in low-yielding government debt — Buffett and Munger see utilities and railroads as much better places to put Berkshire’s billions.