Thu, 3 May 2012
Berkshire's cash stake, Buffett's politics, the housing market, succession, and more will be on the menu at this weekend's annual shareholder meeting.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five. Saturday marks the annual Berkshire Hathaway shareholders meeting, these so-called "Woodstock for Capitalists."
Morningstar markets editor Jeremy Glaser is going to be on the scene, but before we get there, he's going to tell us five things this week that might be on Warren Buffett's buffet.
Jeremy, thanks for joining me.
Jeremy Glaser: You're welcome, Jason. I can't wait to get to what Warrant Buffett calls 'The Cradle of Capitalism.'
Stipp: So, what do you have for The Friday Five this week?
Glaser: This week we're going to talk about Berkshire's cash stake, politics, housing, Bank of America, and finally succession.
Stipp: So, number one, there is always lots of talk about what is Buffett going to do next with all of that money? Where is he going to put it to work? Some people feel like they have some clues, and they have some direction on that. What do you think? Are we going to get some answers here?
Glaser: This is one of those perennial questions, because as Berkshire's cash stake just gets larger, and larger and larger, it's not getting any easier for them to put a lot of this cash to work. And it's just made a lot of shareholders clamor to get some of that back, either through share buybacks or a dividend.
We finally did get share buybacks, as long as Berkshire is trading for about 110% of book value or less, Buffett said he'd be in the market, he'd be buying those shares, he sees that as somewhat of a no-brainer. But right now, Berkshire is trading for above that, and really there haven't been that many share buybacks.
He seems very reticent to put a dividend into place. He really thinks that he can deploy that capital in a more profitable way, and he doesn’t want to commit to making that kind of payout year-in and year-out.
So, I don't think we're going to get a lot of new clarity as to exactly what's going to happen with these billions and billions of dollars on the balance sheet. I think Buffett is still going to stick to his story, that he thinks he can do a better job with that capital than the shareholders can. So far, historically, he's been right, but certainly I think that as he gets on in years, and I think as people think about the future of the company, there's going to be just more and more pressure for them to really get that cash back down to a more manageable level.
Stipp: So, Jeremy, Warren Buffett has never been a stranger to the political arena, but this year his involvement in politics has been much more elevated. What do think the kinds of questions are going to be on that front?
Glaser: Well, Buffett has certainly never been a stranger of letting his opinion be known, either. And I think that this year he's talked a lot about the Buffett Rule, which is the idea that Warren Buffett talks a lot about, that he should be paying at least as high of a tax rate as his secretary, who is of much more modest means.
And I think that shareholders are going to have a few questions for Buffett. The first is going to be, does it really make sense for him to be wading into these political waters? I think that with the country so split politically that basically taking a position that's going to potentially anger half of the population of the country probably doesn't make a ton of business sense, and you really wonder what he expects to gain from this.
I think the answer is likely that at this point in his life and in his career, he feels like he doesn't have a lot to lose personally, so he's willing to go out and make these more public, political stances, even if it's not necessarily in the absolute best interest of general Berkshire shareholders.
So, I think we'll hear a couple questions about it, but I have a strong feeling that no matter what people say in Omaha, he's not going to all of a sudden shy away from the political advocacy that he's been doing over the last year or so.
Stipp: Ahead of the Berkshire Hathaway annual shareholders' meeting, we always get Buffett's annual letter to investors. We got that in February. He made some statements about the housing market. What kind of follow-up questions do you think he'll get?
Glaser: Two years ago, Warren Buffett said the housing recovery was really just around the corner, and this year he revised that to say that he was absolutely dead wrong. He just does not see the housing recovery in the results of the handful of businesses that he owns that really deal directly with the housing sector.
And I think if you've looked at the data over the last few years, this shouldn't be terribly surprising. A lot of data looks like it's about to break out, or things are about to get a lot better, and the next month the data just comes right back. There just doesn't seem to be a way for that recovery really to take hold.
Certainly there has been a stabilization. I think we've probably found a bottom in a lot of markets, but there hasn't really been that huge takeoff. And I think listening to Warren Buffett's take on housing both in his letter, and I'm sure he's going to get more questions about it this weekend, should give us some more insight as to exactly what is happening in the housing market, why aren't people out there buying homes? What's happening with the prices? Does he think that there is this big shadow inventory of homes that's going to flood the market and push prices down again?
I think these are really unanswered questions. We don't have great data about it. We don't know exactly what individual homeowners are going to do or what their collective actions look like. I think that Warren Buffett owning so many of those construction-related, and with Clayton Homes directly housing-related, businesses should give us some insight as to really what's happening in that market.
Stipp: Warren and his partner Charlie Munger often field questions about individual stocks. An interesting one this year could be Bank of America, a stock that's struggled even as a lot of other financials have stepped away from the abyss of the financial crisis. Buffett has a financial interest in Bank of America. What do you think he will be asked about that particularly company?
Glaser: Bank of America really is one of those big question mark stocks. You really hear a lot of discussion about it from investors of all stripes. I think, it's because they really have been having quite a few difficulties putting the financial crisis behind them. They're still dealing with mortgage problems, much more so than a lot of their peers, and they're having still trouble really convincing the market that the past is totally behind them, and that they're on stable footing and will be able to grow earnings, be able to grow dividends in the years to come.
I think certainly Warren Buffett put his stamp of approval on it this year. He said he thinks that Brian Moynihan will be able to turn the business around. That it may take quite some time, but that the franchise value is still incredibly strong, that they'll be able to really bounce back from this eventually.
I think the question for Buffett will be, how long does he really think that's going to take? How long is he willing to wait out Bank of America and wait out this restructuring before he says that this business truly has legs? Will these problems that are coming up now totally subsume the business and really keep it from ever being valuable over the next 10, 15, 20 years, or does he really see it as short-term noise, and that he is going to take the long run and that his long-term perspective is going to win out. I think hearing his take on Bank of America certainly will be instructive.
Stipp: Jeremy you mentioned that Buffett's cash take is a perennial question. If that's perennial question number one, then certainly perennial question number two has to be the succession issue. What kinds of question do you think he'll get this year in light of some recent news?
Glaser: It may seem like kind of a boring topic. It's one that we've talked about year after year after year, as you said, and this year we did get some more information. We now have some investment managers, like Todd Combs, who are in place, who are now running part of the portfolio. He said he selected the successor who is going to be the CEO of the operating business, and that there are also two backups in case that person doesn't work. So really we did get some news that there really is a plan that's coming together.
But on the other hand, we did find out that he does have a stage 1 prostate cancer, and though it certainly doesn't seem that that will prematurely end his life, it definitely highlights that he is not going to be around forever. And I think that it's very important for shareholders to keep an eye on succession, and think about if it's possible to keep the very special culture of Berkshire alive without Warren Buffett.
I think a recent example is probably instructive at Apple. There was a lot of worry about what would happen after Steve Jobs left. And in the short-term, not very much. As Tim Cook has taken over, Apple has really thrived. They've had some of the best quarters. They've had some successful product launches, but nothing terribly innovative. So, over the short term, really what Apple is doing is still riding the products and still riding the initiatives that were hatched under Steve Jobs' tenure. So, even though they're being executed well, we are not seeing a lot of new direction from the company. And it's really that long-term--can Tim Cook, can the new management team at Apple potentially really keep that momentum going, and the same question is going to be at Berkshire.
I think there is no doubt that the immediate transition will be smooth, that they have the mechanism in place in order to make sure that they're not running around like chickens with their head cut off, trying to figure out the password to Berkshire's bank account, but certainly we don't know if over time they'll be able to keep that very special culture, they'll be able to make those great asset allocation decisions, and they'll be able to keep producing just these incredible returns for shareholders.
We might not be able to ever answer that question until we really see the new team in action and see what they're doing. But I think it's important to ask Warren Buffett how he is going to instill that culture really amongst all of the Berkshire operating businesses, and if they'll be able to do that successfully in the years that they have left.
Stipp: Jeremy, I'll look forward to getting insights on these issues and many more from this weekend's Berkshire Hathaway annual shareholders' meeting. You'll be on the ground there in Omaha. But thanks for joining me today and giving me the preview.
Glaser: You're quite welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.