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Why Berkshire Hathaway owns this ASX company I’d also like to own

Insurance Australia Group Ltd (ASX: IAG) is a provider of general insurance, including a full range of personal and commercial insurance products. Warren Buffett is a fan of insurance companies because of the upfront capital they provide and 3 years ago, IAG caught the eye of the ‘Oracle of Omaha’. 

In 2015, Berkshire Hathaway purchased $500 million worth of Insurance Australia Group Ltd at an average price of $5.57. Since then, the IAG share price has increased 48.7%. 

This 3-year share price rise is a continuation on a decade of strong performances. Since 2008, the IAG share price has grown from below $3.30 to its current price of $8.28, largely reflecting the strong earnings growth by the company. 

From 2008 to 2017, IAG grew its earnings per share from $0.08c to $0.38c whilst increasing its dividend from $0.23c to $0.33c. As a result, in that 10-year period, IAG returned $2.67 in earnings per share whilst paying out $2.52 in fully franked dividends. 

Concurrently, IAG managed to grow book value per share from $2.24 to $2.77. As such, from 2008 to 2017, IAG achieved $0.15c in retained earnings for $0.53c growth in book value per share. 

Warren Buffett has stated that he prefers companies that have positive returns on retained earnings. Specifically speaking, Buffett believes that for every dollar retained by a business, at least one dollar of value should be created for the owners. 

Using this approach, for every $1 that IAG has retained over the past 10 years, $3.51 has been returned on book value. In fact, compared to the ASX Top 20, IAG is the strongest performing company based on this interpretation of return on retained earnings. 

If you agree with Warren Buffett, IAG is a great company to own and with a market capital of $19.6 billion, it has a P/E ratio of 19 and a dividend yield of 4.1%. Berkshire Hathaway Inc. still holds IAG shares which based on Buffett’s history, indicates that value is still available.  

Another positive is that IAG appears to be running a tight ship with apparent emphasis on responsible behaviour. Unlike its primary competitor Suncorp Group Ltd (ASX: SUN), IAG is yet to be summoned before the Royal Commission into the financial sector.  

The combination of a strong financial position, historical reliability and efficiency in addition to responsible and ethical business behaviour suggests that IAG is a must consider for all long-term investors. 

Foolish takeaway

Personally, whilst I agree that there is value present on current prices, I believe there is more value elsewhere. However, should the market offer this business at a discount, I would strongly consider buying shares in Insurance Australia Group Ltd. 

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Motley Fool contributor Matt Breen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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