New Berkshire Hathaway (BRKA 0.39%)(BRKB 0.28%) CEO Greg Abel officially kicked off his tenure as the large conglomerate’s new chief with an 18-page letter to shareholders, officially replacing the annual letter that former CEO Warren Buffett had penned for decades. Abel provided many details, including how he plans to run the company, an overview of its current state, and an unprecedented look at how Berkshire views many positions in its roughly $315 billion equities portfolio.
Here are three things investors need to know.
Image source: The Motley Fool.
1. Berkshire Hathaway’s corporate structure moving forward
Berkshire is comprised of many businesses, including insurance, energy, mortgages, and railroads, to name a few. In total, Berkshire has 51 noninsurance operating divisions.
Abel said the company will maintain its decentralized model in which the leaders of each Berkshire business have greater autonomy, less bureaucracy, and, of course, accountability, a combination that Abel and the company have seen great results from and believe is a “competitive advantage.”
The insurance business will, of course, be led by Berkshire veteran Ajit Jain, who is highly praised by Buffett and Abel. Adam Johnson, who has served as the president and CEO of Berkshire subsidiary NetJets and worked at Berkshire for three decades, will become president of all of Berkshire’s consumer products, services, and retailing businesses, comprising 32 noninsurance operating companies.
Interestingly, Abel noted he will ultimately be responsible for allocating capital in the company’s large equities portfolio, which is how Berkshire invests the float generated by the insurance operations. Abel has never served as a portfolio manager or officially helped run the equities portfolio. Top investing lieutenant Ted Weschler will continue to manage about 6% of the portfolio.
2. Most of Berkshire’s equities portfolio is expected to have “limited activity” moving forward
For those who follow Berkshire’s equities portfolio, Abel’s letter provided details about the company’s plans that Buffett rarely provided. The new CEO said that four stocks in Berkshire’s portfolio, Apple, American Express, Coca-Cola, and Moody’s, will likely see “limited activity in these holdings.” This surprised many because Berkshire has significantly trimmed its Apple position, something Buffett rarely does when he plans to hold a stock long term.
Abel described these four companies as “businesses we understand well, have a high regard for their leaders, and expect will compound over decades,” though he did not rule out changing the concentration of one of these holdings if “we see fundamental changes in its long-term economic prospects.” Abel also said the “same criteria” would apply to Berkshire’s investments in five Japanese trading houses.
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Collectively, these nine stocks made up about two-thirds of Berkshire’s portfolio when Abel wrote the letter. This was arguably the greatest insight from Abel, because I don’t think the market expected Berkshire’s investment philosophy to be this rigid moving forward, even though Berkshire does like to buy stocks it can hold forever.
Furthermore, Buffett has often said in recent years that Berkshire’s massive size makes it difficult for the company to move in and out of investments as it once did or to find anything big enough that makes sense to invest in. However, Abel’s comments have led some to wonder whether Berkshire’s time of active investing may be coming to an end.
3. How dividends and share repurchases will be handled
With Buffett gone, it’s going to take a while for Abel to command the same premium for Berkshire’s stock that Buffett, arguably the greatest investor of all time, once did. This has led investors to wonder if Berkshire might consider more aggressive capital distributions to shareholders. After all, the company has a war chest of $370 billion in cash and short-term U.S. Treasury bonds.
Some analysts and experts believed Berkshire might start paying a dividend for the first time. However, Abel said the company’s approach to dividends remains the same: It will not pay them so long as it believes it can continue to create value by investing in the business. However, Abel did not completely rule out a dividend, noting that the company’s board of directors reviews this policy annually.
Berkshire also hasn’t been very aggressive with share repurchases in recent years. Abel reminded shareholders that the company’s policy is to repurchase shares when they trade below what Berkshire’s management team believes to be the company’s intrinsic value, thereby increasing shareholder value. Abel noted the company will also consider purchasing large blocks of shares from major investors when possible.
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