This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
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Warren Buffett is retiring at the end of the year.
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He's leaving the company in great shape.
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Incoming CEO Greg Abel will have numerous options to grow shareholder value.
Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) is nearing the end of an era. Long-time CEO Warren Buffett is retiring at the end of this year. That adds some uncertainty about what's ahead for the conglomerate.
Despite that uncertainty, now is a great time to invest in Berkshire Hathaway. Here's one reason why investors shouldn't hesitate to buy the stock right now.
In a great position
Berkshire Hathaway reported its third-quarter financial results earlier this month, the last time before Warren Buffett's retirement as the CEO. The company reported a robust 34% increase in its operating profit, which rose to $13.5 billion on lower insurance losses in the period. Berkshire also posted a 17% increase in its net income, which rose to $30.8 billion.
The company continued to retain all of its earnings. Berkshire didn't repurchase any of its shares during the quarter (it hasn't bought back stock for five straight quarters) and hasn't paid a dividend since 1967. Additionally, the company continued to be a net seller of stocks out of its investment portfolio. It has sold more stocks than it bought for 12 straight quarters. As a result, Berkshire ended the period with a record $381.7 billion in cash.
While Buffett's company has been a net seller of stocks, including continuing to trim its positions in Apple and Bank of America, the company has a more than $306 billion investment portfolio. Berkshire Hathaway recently added a meaningful new position, purchasing $4.3 billion of shares in Alphabet during the third quarter. The technology giant is currently its 13th largest holding at 1.8% of its investment portfolio.
In addition to its cash position and stock portfolio, Berkshire owns nearly 200 operating businesses, including BNSF railroad, Dairy Queen, and GEICO. With its market capitalization currently over $1 trillion, these operating businesses are worth nearly $400 billion after subtracting Berkshire's cash position and the value of its investment portfolio. The company is bolstering its operating portfolio after recently agreeing to acquire the chemicals business of Occidental Petroleum (one of its largest stock holdings) in a $9.7 billion deal. The acquisition will expand Berkshire's chemicals portfolio (it previously bought Lubrizol for $9.7 billion in 2011), while providing it with another strong operating business that should generate relatively stable and growing earnings.
Tremendous optionality
Warren Buffett is handing over a tremendous company to his successor, Greg Abel. It has a record cash position, a strong portfolio of operating companies, and a massive investment portfolio. That gives Abel an extraordinary amount of flexibility to guide the company in the future.
With a record $381 billion in cash, Abel could buy nearly any company he wanted to expand Berkshire's operating portfolio. He could easily top Buffett's biggest deal, which was the 2016 acquisition of Precision Castparts for $37 billion. However, going for a big splashy deal might not make the most sense, as Buffett eventually lamented the price his company paid for Precision Castparts after writing off nearly $10 billion of that company's value in 2011. More than likely, Abel will remain disciplined and only pursue a sizable acquisition if it's too good to pass up.
Abel can also use the company's massive cash position to add to Berkshire's investment portfolio. He likely had some say in Berkshire's recent decision to make a sizable investment in Alphabet.
Finally, Abel will have the flexibility to return more cash to investors. For example, while Warren Buffett has been reluctant to pay a dividend, Abel might opt to initiate a quarterly payment to return some cash to investors, given the strength of its operating cash flows and size of its cash position. He could also start making more routine share repurchases compared to his value-oriented predecessor. Unless the company starts putting more cash to work in new investments, it might need to return more money to shareholders. It will become increasingly difficult for the company to justify retaining such a large amount of cash on its balance sheet, especially given the expected decline in interest rates as the Federal Reserve continues to lower them.
Starting an exciting new chapter
Berkshire Hathaway is about to turn the page on an illustrious part of its history with Warren Buffett's upcoming retirement. He's leaving the company in great shape and capable hands, which makes the next chapter look exciting. That's why right now looks like a great time to buy shares of Berkshire.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
