What Questions Should Be Asked of Berkshire This Year?
Morningstar's Gregg Warren, who will be on the analyst panel at this year's meeting, details the questions he hopes Buffett and Munger will address.
The main focus of Berkshire Hathaway's (BRK.A) (BRK.B) annual meeting is the question-and-answer segment that Warren Buffett and Charlie Munger hold, where the two men have for a number of years fielded questions from a trio of financial journalists and from shareholders themselves (via a lottery). Starting in 2012, Berkshire included in the Q&A segment a panel of three sell-side insurance analysts who cover the company's stock.
The analyst panel remains in place, but has been tweaked in subsequent years to include just one insurance analyst from the sell-side--which is Jay Gelb of Barclays this year--one generalist analyst from the buy-side--with Jonathan Brandt of Ruane, Cunniff & Goldfarb, the investment firm behind the Sequoia (SEQUX) fund, returning this year--and what was supposed to be an analyst/investor who is bearish on Berkshire. As Buffett was unable to find an "accredited bear" this year, an invitation was extended to Morningstar in its capacity as an independent research firm. We continue to favor the inclusion of the analyst panel in the Q&A segment (and not just for purely selfish reasons), as we believe that it helps to focus the discussion during the meeting on more company-specific topics.
While we reserve the right to hold some of our questions closer to the vest, as we are likely to get six to eight questions in during the Q&A segment. As we need to have a bevy of questions ready in the event that other panelists (or shareholders) touch on topics we are hoping to address, we thought we would preview some of the questions that are likely to be brought up this year.
Future Acquisitions and Investments
Acquisitions have historically been a major part of Berkshire's business and value creation, a trend that we expect to continue. Given that the company has a meaningful amount of cash on its balance sheet, which is currently generating near-zero return, we believe it is imperative that Berkshire puts capital to work in more profitable investment opportunities. Furthermore, as the firm grows ever larger, acquisitions will need to be large enough to move the needle in terms of maintaining a lower cash position overall, as well as being additive to profitability.
Investment Portfolio, Style and Responsibilities
The investment portfolio in Berkshire's insurance operations is rather substantial, composed of $115.5 billion of equities, $42.6 billion of cash and cash equivalents, $28.8 billion of fixed-income securities, and $12.3 billion of other investments, which include the preferred stock of Wrigley, Dow Chemical (DOW), and Bank of America (BAC), as well as the warrants to purchase Bank of America's common stock. The company's investment in Heinz, which includes a 50% equity stake in the now-private firm, as well as $8 billion worth of 8% preferred stock, is accounted for on the equity method, but still remains an important investment for the firm.
Since Buffett started to transfer responsibilities for the investment portfolio over to his two lieutenants (Ted Weschler and Todd Combs) the two have gone from managing around $3 billion each in early 2012 to managing more than $7 billion each earlier this year. While this represents just 10% of Berkshire's equity portfolio, we feel that it does not reflect the contribution that both men have made to the firm in just the past couple of years--more than we had even envisioned a few short years ago. Their investment performance, from what we can tell, has also been pretty good since they came on board, and we believe that Buffett has also included the two managers in some of Berkshire's nontraditional investments lately, like the firm's dealing with Media General, as well as the partnership with 3G Capital to purchase Heinz. That said, what their full responsibilities end up being, and how much flexibility they ultimately have with the large legacy positions that Berkshire holds in names like Wells Fargo (WFC), Coca-Cola (KO), American Express (AXP), and IBM (IBM) remains to be seen.
Excess Cash on the Balance Sheet
Berkshire's sizable cash position continues to grow through the normal course of its business, and despite making investments and funding acquisitions through the course of the past two years the firm still closed out 2012 and 2013 with more than $45 billion in cash and cash equivalents on its books. While Buffett does like to keep $20 billion on hand as a backstop for the insurance business, which we believe is prudent, the firm is still carrying more than $20 billion in excess cash, earning relatively little in an environment of historically low interest rates. If the firm cannot find a better use for the cash, we believe that Buffett should rethink his policy of retaining all of Berkshire's earnings and perhaps pay out a one-time dividend. While Buffett laid out his thinking on (as well as his opposition to) a dividend in last year's annual letter, we expect questions on his thinking during this year's meeting.
With Buffett turning 84 later this year, and Munger passing his 90th birthday at the beginning of 2014, succession has become an increasingly important concern for long-term investors. Buffett has stated that he wants his three roles--chairman, CEO, and investment manager--to be split upon his retirement from the firm. He has previously announced that his son, Howard, would likely become nonexecutive chairman, and we gained a little more clarity into the plan for the investment side of the business when Combs and Weschler were hired, with both men taking on responsibility for managing an ever-increasing portion of the portfolio. That said, questions still remain about who will step into the CEO role, with Buffett only noting that Berkshire's board of directors has a candidate in mind to replace him as chief executive, and that this person is "an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire." Buffett has also noted that the board has "two superb back-up candidates" in mind, in the event that the first pick for the CEO role is not available.
Thoughts on the Economy and Regulation
While not economic prognosticators in the traditional sense, Buffett and Munger are typically probed for their opinion on the state of the U.S. and global economies. Following Buffett's well-publicized bullish stance on stocks and the U.S. economy during the depths of the financial crisis--including an editorial in The New York Times about "buying American," in mid-October 2008--the Oracle of Omaha has been solidly behind the long-term viability of the U.S. economy. Given where we are today, we'd like to see if his thesis has evolved. We would also note that many of Berkshire's noninsurance businesses are economically sensitive, and are exposed to a fair amount of regulation, so getting their take on key issues is always valuable.
Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.