Questions We'd Like to Hear at Berkshire's Annual Meeting
We'd like to see Buffett address future acquisitions, his take on the economy, the firm's succession plan, and more at this year's annual meeting.
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). In an added twist, Berkshire included a panel of three analysts who cover Berkshire's stock in the Q&A segment last year.
The panel remains in place for this year's meeting, as well, but has been tweaked a little to include one insurance analyst from the sell-side (Cliff Gallant of Nomura Securities (NMR)), one generalist analyst from the buy-side (Jonathan Brandt of Ruane, Cunniff & Goldfarb--the investment firm behind
Sequoia (SEQUX)), and an analyst/investor who is bearish on Berkshire (which we now know will be Doug Kass, founder of the hedge fund firm Seabreeze Partners Management).
We continue to favor the inclusion of the analyst panel in the Q&A segment, as we believe that it helps to focus the discussion during the meeting on more company-specific topics. By inviting a bearish analyst to ask a portion of the questions this year, we think that we'll see more contrarian opinions on the firm discussed than we've seen in past periods, which should be a positive for both Berkshire and its shareholders. Although the topics can run the gamut, we've laid out some of the key issues we expect to be broached during the course of this year's annual meeting, as well as some specific questions we'd like to have answered during the weekend.
Future Acquisitions and Investments
Historically, acquisitions have been a major part of Berkshire's business and value creation, a trend we expect to continue. Given that the company has a significant amount of cash on its balance sheet, which is currently generating near-zero return, we believe it is imperative that Berkshire put capital to work in profitable investment opportunities. Furthermore, as the firm grows ever larger, future acquisitions will need to be large enough to move the needle in terms of cash position and profitability.
Excess Cash on the Balance Sheet
With the majority of the lucrative investments that were made during the financial crisis--Swiss Re (SSREY), Goldman Sachs (GS), General Electric (GE), Dow Chemical (DOW), and Wrigley--having been repaid during the last couple of years, Berkshire has struggled to find investments that would match the yield produced by these holdings. Although the firm was finally able to put most of the money back to work in Bank of America (BAC) (during the third quarter of 2011) and Heinz (during the first quarter of 2013) at rates that came close to matching those it was earning on its financial-crisis investments, Berkshire's sizable cash position continues to grow through the normal course of its business (and was likely north of $35 billion at the end of the first quarter after adjusting for the $12 billion outlay for Heinz). With yields on money market funds and short-term bonds at historically low levels, this cash is earning very little for shareholders. Even though Buffett laid out his thinking on (including his opposition to) a dividend in this year's annual letter, we expect some investors to question and/or push back on this thinking during the upcoming meeting.
With Buffett turning 83 years of age later this year, and Munger passing his 89th birthday at the beginning of 2013, 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 Todd Combs and Ted Weschler were hired, with both men taking on responsibility for managing an ever-increasing portion of the portfolio.
Thoughts on the Economy
Although not an economic prognosticator in the traditional sense, many people often ask Buffett and Munger for their opinion on the state of the U.S. and global economies. Following Buffett's well-publicized bullish stance 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.
Berkshire's Operating Subsidiaries
Berkshire's noninsurance subsidiaries run the gamut from brick manufacturing and railroads to energy companies and diamond stores. The operations represent a wide sample of the domestic economy and, to different extents, are affected by cyclical ebbs and flows. There is no common theme running across the subsidiaries except the fact that Buffett believes he acquired them for a reasonable price and their businesses benefit from long-term competitive advantages. That said, questions about Berkshire's subsidiaries can reveal further details about Buffett's opinion of the markets, possible future acquisition targets, and the economy more generally.
The Insurance Market
Although shrinking as the company invests in other areas, insurance is still the core of Berkshire's operations. We estimate that Berkshire's insurance operations are responsible for more than half of the company's aggregate intrinsic value. Insurance is an inherently cyclical business where the cycles are largely unrelated to the economy as a whole. There has been an abundance of capital in the industry, which has led to soft prices for a number of years, though some prognosticators have been calling for a turn in the cycle given low investment yields and artificially inflated profitability figures, while others (such as ourselves) believe it may take a large industry loss or other catalyst in order to drive a change in pricing behavior. Given his company's size in the insurance market as well as its long-term perspective, it is interesting to hear Buffett's commentary on the insurance industry.
Drew Woodbury does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.