More than 30,000 investors descended on Omaha for this year's Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) annual shareholder meeting. But millions of other investors can benefit from the incisive, common-sense insights that came from Warren Buffett and Charlie Munger's marathon question and answer session during the meeting.
What follows is my account of the Berkshire meeting's highlights — the hot-button topics and the less discussed. I hope you'll enjoy reading them as much as I enjoyed watching.
Should Berkshire pay dividend?
Buffett took the dividend monster — a continuous source of contention as Berkshire and its cash hoard grows ever larger — by the horns early in the meeting's minutes. Instead of presenting his arguments against the idea, he simply presented the shareholder proxy-vote results. Shareholders voted a convincing 45-to-1 against a dividend.
The implication of his words is clear: Accept Berkshire for what it is — the dominion of Buffett. I highly doubt that Berkshire will pay a dividend for as long as Buffett lives and perhaps longer. An investment in the conglomerate is not about return of capital. Instead, it's about long-term growth of invested capital.
If you're looking for dividends, Berkshire probably isn't the investment for you. And it's also important to remember that dividends create an immediate handicap to market-beating performance for Berkshire shareholders since there's a tax bite of as much as 20%.
Ever thoughtful, Buffett also didn't completely dismiss a key Berkshire problem — the challenge of investing its massive amount of cash. He also acknowledged that at some point, Berkshire will have more money that it can profitably invest. And in true Buffett form, he somewhat mysteriously dealt with it. His paraphrased remarks: "It'll be dealt with at that time."
On not going to war with Coke
A lot of press time has been devoted to the notion that Coca-Cola's (NYSE: KO) new compensation plan is unduly generous, and that Buffett didn't directly oppose the plan. Instead of voting "no" to the plan, he instead abstained, which has been seen as a less-damning disagreement.
His stated rationale for his action: "We had no desire to go to war with Coca-Cola."
At the core is a more complicated social and organisational issue, which Buffett covered further. There's no such thing as a truly independent compensation committee. Board members and management teams are obliged to work together, and the loud, squeaky wheel can wind up getting ignored, no matter how wise they are. To effectively accomplish anything, the smart contrarian must choose his or her battles.
The 3G partnership
In the past, Berkshire's prided itself on the passive model. It acquired good companies, let capable managers operate, and trusted they would deliver. Berkshire's deal to purchase Heinz with its Brazilian private-equity partner, 3G Capital, seems like a twist on that model.
3G's modus operandi is different. They're role-up-your-sleeves investors that take more of a role in operations. They don't hesitate to cut fat and ruthlessly measure efficiency — sometimes to the displeasure of the acquired company's employees. That's not Berkshire's wheelhouse. For that reason alone, the 3G partnership was somewhat unexpected.
Equally surprising, though, was Buffett's remark during the meeting that he's willing — and actively hopes — to take on other investments with 3G. That's significant because it opens a new universe of investment opportunity to Berkshire — namely, situations where a hands-on approach yields efficiencies.
If you ask me, possible targets for future Berkshire/3G deals include: Kraft, Mondelez, Kellogg, and General Mills.
Berkshire's benchmark
For almost all of its recorded history, Berkshire has measured its performance by comparing growth in book value per share to the gains in the S&P 500 index.
But when asked about this comparison, Charlie Munger was uncharacteristically outspoken. Munger noted that, "Warren likes to make it difficult for himself." In effect, he said the measure was an unnecessary handicap, in part because the S&P's gains are pre-tax, whereas book value gains are after-tax.
In the past, this comparison may have made more sense for Berkshire. But that measure is increasingly inappropriate today because the composition of the Berkshire business has changed significantly. Twenty years ago, investments were 80% of Berkshire's total assets. Today, they sit around 35%. So Berkshire is increasingly more operating company than investment company. For good operating businesses, book value growth will almost always lag the relevant stock index.
When Berkshire is super cheap
Buffett has repeatedly said that he's willing to repurchase Berkshire shares at 1.2 times book value. But never have I heard him be as explicit as he was at this year's meeting. On Saturday, Buffett was unequivocal: At 1.2 times, he believes the company's stock trades at a significant discount to intrinsic value.
There's a certain genius in this proclamation. By saying that he's willing to repurchase shares at 1.2 times book value, he's basically guaranteed that the shares will never trade below this threshold. After all, why would the collective market differ from the world's greatest investor?
Speculations on succession
My guess on the next Berkshire CEO: Matt Rose, the Chairman of Burlington Northern Santa Fe.
At the end of 2013, Rose stepped out of the CEO role at BNSF and into the Chairman capacity. To my knowledge, there was almost no press mention of his role change. That's more interesting if we remember that Buffett is an expert at using the media to his advantage… when it serves him.
During an interview with CNBC's Becky Quick, Rose was asked whether he was stepping back. He responded by saying that he wasn't going anywhere, but instead, he is getting his successor up to speed and working as hard as ever. My guess on the why: He's trying to ensure a smooth transition when he eventually moves to the Berkshire CEO role.
Significantly, Rose has great experience operating the sort of business Buffett has recently favoured — capital-intensive, industrial companies with strong moats (ie, competitive advantage). For the Berkshire of the next 20 years, these are great investments, because they provide reinvestment outlets for Berkshire's giant cash stores. That also makes Rose ideally suited to the CEO role.
No break-up… for now
Along with his remarks on share buybacks, Buffett again emphasised that he believes Berkshire is currently at its best in its conglomerate form. So for those that would like to see a spin-off, sale, or IPO of select Berkshire segments, don't sit on the edge of your seat.
Longer-term, I don't think it's out of the question though. Spinning off one or more businesses is a tax-effective way to ensure that Berkshire maintains market-beating returns. It's easier to beat the market when you have less cash to invest.
Retail and circle of competence
Interestingly, Buffett noted that most of his investment misses — at least those related to straying outside his circle of competence — have been in retail. Without explicitly saying, he more or less chalked this up to not knowing the businesses.
I take a somewhat different view. Retail and consumer goods companies with solid, enduring brands possess a license to print cash. That's good, except for one thing: The prospect for that license to print cash to stick around is uncertain, and sometimes it disappears very quickly. Brands move in and out of fashion and that makes long-term cash generation nearly impossible to estimate.
