Warren Buffet, often dubbed “the Sage of Nebraska”, built with his business partner Charles Munger a giant Holding Company called Berkshire Hathaway.
Dividend Growth Investors in particular study the value investing approach of these two gentlemen which stands at the core of their incredible success.
Just looking into Berkshire Hathaway’s stock dividend portfolio reveals an enviable business empire that churns out amazing amount cash flows ready to be re-invested.
For instance, Berkshire Hathaway is the 100 % owner of the US auto insurance company GEICO, the battery business Duracell, the American chain of ice cream and fast-food restaurants Dairy Queen and the US railway company Burlington Northern Santa Fe.
But equally, interestingly, the conglomerate Berkshire Hathaway has significant stakes in KraftHeinz, Visa, Mastercard, Goldman Sachs, Coca-Cola, and i-phone producer Apple.
Just think of that: Berkshire Hathaway Apple Stake has a market value of over USD 100 Bn.
Many holdings of Berkshire Hathaway have a history of increasing their dividend payouts, just to name a few of them: Coca-Cola, Visa, Mastercard, and Apple.
And on top of that massive portfolio of various businesses and stock holdings, Berkshire Hathaway stock sits on a huge cash pile of over USD 100 Bn! That’s a massive war chest, putting the conglomerate to act very smoothly in order to acquire stocks and even whole businesses.
So, we are truly talking about a kind of business castle with a broad and deep economic moat.
But is it really unshakeable or are some of the holding positions or even the whole business model of the conglomerate Berkshire Hathaway under some threat?
As we all know, companies in several industries are under pressure of being disrupted in the medium term. Berkshire Hathaway has several bank stocks in its portfolio such as Bank of America, Wells Fargo, etc.
Fintech companies such as Square are the ultimate bank industry disruptor and honestly, I cannot recognize appropriate, exhaustive, and convening efforts from traditional banks all over the world to adapt to fast-changing trends. So, these bank positions of Berkshire Hathaway are certainly not bulletproof.
The same with credit card companies Visa and Mastercard and the whole insurance businesses in the Berkshire Hattaway conglomerate.
The insurance holdings are the basis for “the float”, the lifeblood of the Berkshire Hattaway empire. This is money paid to the insurance subsidiaries in form of premia but these cash flows have not yet to be used to cover all claims. This is money in hand to be invested. “The float” within Berkshire Hattaway is over USD 120 Bn! It’s huge and increasing through the magic power of the compound effect. Just to compare, since 1970 “the float” has increased 3’000 times.
But it is exactly the insurance businesses such as Geico that will almost certainly see pressure in the medium run from fintech companies but also from other disruptive businesses like Tesla.
Tesla is not just an electric car maker, it’s extremely strong in software and collects a massive amount of data it can use to diversify its business. Tesla has already set its foot into car insurance, and it is truly capable to provide tailor-made services due to its gigantic data pool which already dwarfs the one of Geico.
So, to sum up, there are clearly some major threats. On the other side, Berkshire Hathaway is well-diversified, there are multiple strong and growing cash flow streams, and what is very encouraging: Berkshire Hathaway has to some extent “modernized” its stock portfolio, just look at the huge Apple stake but also stock holdings in Amazon. What’s incredibly interesting is the position in the Chinese conglomerate Build Your Dreams (BYD). BYD is an extraordinary business, building amongst others electric cars. it was in 2008, when one of Berkshire Hathaway’s subsidiaries took a stake in BYD, for roughly USD 230 Million. Well, today, that position is almost worth USD 5.5. Bn.
And there is so much more to like about Berkshire Hathaway. The fact that the business conglomerate has a huge cash pile and does not distribute Free Cash Flows to shareholders gives a lot of confidence, that the growth engine can remain intact, given ample cash amounts constantly being put to work.
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