Many investors consider Warren Buffett the best living share market investor and like to follow his investment advice, style and even stock picks direct.
After all Buffett has built an estimated US$86 billion personal fortune through share market investing and his investment holding company Berkshire Hathaway is estimated to have a market value around US$589 billion.
Buffett has only ever bought one ASX share according to publicly available information and that was back in June 2015, when Berkshire bought a 3.7% stake in Insurance Australia Group Ltd (ASX: IAG) via a $500 million share placement.
When the deal was announced on June 16, 2015 the IAG share price was around $5.70, whereas today it is $7.07.
This means Buffett has already made a healthy total return on his investment of around 24% plus substantial dividend payments along the way.
So let's take a look at why Warren Buffett bought IAG shares and why you might want to.
Dividends – Buffett's reputation as a conservative investor has paid off in spades for him as time in the share market often does the heavy lifting. Buffett's focus on the insurance sector has seen it return a lot of dividends to him, with IAG paying 34 cents per share in FY 2018 it yields 4.8% plus franking credits on a trailing basis. IAG also announced a 'capital return' of 19.5 cents per share on 31 October 2018, alongside a 5.5 cents per share special dividend.
Capital support – Buffett's Berkshire Hathaway group's expertise and focus historically has been on owning insurance businesses and its partnership with IAG is also strategic in that it helps IAG maintain its capital reserve ratios and capital flexibility. In being able to take advantage of Berkshire's liquidity, IAG has a strong advantage over rivals.
Blue chip – Buffett's strategy is well-known to be buying blue-chip businesses on a buy-to-hold basis on a reasonable valuation. IAG is in a strong competitive position in the Australia and New Zealand market with limited competition from the likes of QBE Insurance Group Ltd (ASX: QBE) and Suncorp Group Ltd (ASX: SUN). Given the size of the market for automobile or home insurance services, IAG's revenues can be considered reasonably defensive.
Reinsurance services – Berkshire has been working with IAG since 2000 largely in the reinsurance space, which is basically insurance for insurers against the risk of severe weather events or similar causing a large amount of claims at the same time. In having the partnership, IAG maintains better reinsurance rates than it otherwise might do on the open market.
Value – Buffett is probably most famous of all as a value investor in wanting to buy companies at a discount to what he considers their net present value. IAG has historically traded on earnings multiples in line with or below the market average. Also, Buffett is known for favouring quality businesses on a fair valuation, over weak businesses on a cheap valuation. IAG's share price has outperformed both QBE and Suncorp over the past five years, which suggests on a historical basis this is the best quality business.
