Motley Fool Money - Berkshire After Charlie

Episode Date: February 26, 2024

Warren Buffett’s annual letter points to a steady path ahead. (00:21) Jason Moser and Deidre Woollard discuss: - Why Berkshire Hathaway doesn’t pay a dividend. - If utility businesses are in trouble. - What a mountain of cash means for the insurance business. (17:53) Ken Costa, author of The $100 Trillion Dollar Wealth Transfer, explains how a sea change in wealth could impact the world’s financial future. Companies discussed: BRK.A, BRK.B, DPZ, LULU Claim your Epic discount: www.fool.com/epic Host: Deidre Woollard Guests: Jason Moser, Ken Costa Producer: Ricky Mulvey Engineers: Dan Boyd, Chace Przylepa Learn more about your ad choices. Visit megaphone.fm/adchoices

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Settle in friends. It's Uncle Warren story time. Motley Full Money starts now. Welcome to Motley Full Money. I'm Deidre Willard here with Motley Fool analyst, Jason Moser. Jason, how's your Monday going so far? Hey, Deidre, going really well. It's beautiful weather here in Northern Virginia.

So, you know, I feel like maybe spring is just around the poor. Yeah, I hope so. Well, over the weekend, Berkshire Hathaway's annual report dropped. So we've got the task of looking at it. Interesting report. You know, even if you're not at Berkshire Hathaway, investor, take a look at it. You don't have to read the whole 152 pages. The first 16 will do you. You know, it was first one without Charlie Munger, beautiful to hear him call Charlie, the architect

of Berkshire. But he also went back on one of the things he loves to talk about, operating earnings versus net earnings. So he calls net income worth than useless. So he says it doesn't reflect a company's true status. He shows the, you know, the operating earnings versus the net earnings. I don't know, Jason. He's talked about it for years. He's right. But it's not like anybody else is doing the same thing and reporting both, or at least not in a lot, a lot of companies. No, it definitely feels like it's kind of hit or miss as to how companies will view this. And, I mean, I understand that to a degree, right? I mean, not all companies are the same, right? So there are certain metrics, I think, with certain businesses that can start to make a little bit more sense. In the case of Berkshire Hathaway specifically, I mean, I do understand his gripes with net income,

particularly when you consider the accounting updates that were changed in 2018, I think it was, which ultimately, and he pointed this out in the letter, right? I mean, it can ultimately change that the capital gains or losses that they can realize, that Berkshire can realize to the excess of $5 billion on any given day. And a lot of that is because Berkshire Hathaway, we know, it's a business that does a lot of things, but one of the things it does and does very well is invests, right? I mean, they invest a lot of, a lot of their capital into businesses. And in the value of those businesses, right? That changes day to day, just like we've

in this in the stock market. And so his gripe with net income is that it's not really reflective of the actual business of Berkshire Hathaway, right? The operating earnings give you a better window into sort of how the actual business itself really is doing. And so I do understand that perspective. I mean, you can argue he's much more focused on the long-term shareholder, and I think that's what so many of us like about Berkshire, about Buffett, and about the late Charlie Munger. But it is one of those things that it doesn't, it's just,

it's not one of those things that applies the same to every business. but I absolutely understand why he feels so strongly about it in regard to, in regard to Berkshire Athaway. Well, you mentioned the long-term investor, and in this letter, he takes the framework of talking to his sister, Bertie, and talking about the reasons why people buy Berkshire. They don't buy Berkshire to cash in on a hot stock. They buy it the same way you might, you described it as the same way you might buy a farm or rental property. thing I'm wondering here is, Berkshire, it's sitting on this mountain of cash.

Like, how big is this mountain of cash so big that they could really buy most of the S&P 500? Just about every company, not every company, but a lot of them. So big, it's kind of hard to get your brain around. But he's also said most of the companies that are worth investing in, they're too pricey.

Outside the U.S., he's seeing no candidates for meaningful options for capital deployment. You know, I keep asking, Should Berkshire just pay a dividend? I know they're probably not going to in Warren's lifetime, but what frame the argument for me there? Well, it certainly feels like he, I think you're probably right. It feels like at least we shouldn't expect that for the rest of his lifetime, which is funny because you know he loves owning all of these businesses that pay that company so much in dividends every year, right? And so, I mean, from that perspective, I mean, there is sort of a second order dividend that

we get from Berkshire that shareholders in Berkshire Hathaway get just by virtue of the fact that the company owns so many businesses that pay them dividends. But you're right. I mean, what, it's $167 billion some odd dollars they have on the balance sheet now at this point. And, I mean, the debt that they have on the balance sheet is it's just well-structured, staggered out. I mean, that's not a concern, right? I mean, it's just, Berkshire is just this amalgamation of just these cash producing businesses.

And I mean, it feels like a dividend would be in order, even maybe just a special dividend. And maybe there will be some sort of tax law or something that comes up that prompts them to initiate a special dividend. I mean, we've seen that happen before. I mean, Costco stands out as a company that did that not all that long ago. But yeah, I mean, he clearly loves the businesses that pay them dividends. We just haven't seen them want to take that next step with the direct shareholders. I mean, it's that age-old argument, right? They do that because they believe that they can put that money to better use.

So far, it's worked out pretty well for shareholders, right? It's difficult to argue against that. But by the same token, you see this quote, this passage in the letter this year, and I'll go ahead and read this. I think it's important. It says, quote, with our present mix of businesses, Berkshire should do a bit better than the average American corporation, and more important, should also operate with materially less risk of permanent loss of capital.

Anything beyond slightly better, though, is wishful thinking, end quote. And so he's starting to acknowledge that Berkshire is really big. Deploying that capital and finding acceptable and outperforming rates of return is becoming more. more and more difficult. So it feels to me like we're closer to Berkshire offering up a dividend at some point, but when they do that is still anyone's guess. Yeah, yeah, absolutely. And I think it's important that, you know, he's not promising as eye-popping results, but he is looking to a, you know, a market beating or, you know, around like 15 percent return. So it's not exactly like the company's not going to grow at all. It's just not going to, it's not going to do these massive numbers. The other

thing I find interesting is that they do buy back. So I was talking to Jim Gillies, our friend and analyst, and he was pointing out that they bought back around, I think it was 12% over the last, I think it's about five years. So there is that happening. And you know, with Berkshire, it's not one of those things where you have to worry if a company is buying back the wrong time. It's Berkshire. They always picked the right time. But do you think maybe, I like to believe so, but do you think maybe we'll see more of the buybacks instead of the dividends? I really just, I think that really depends on how much longer Buffett is actually in there calling the shots. I really do believe that we, Berkshire, I think, is always going to be Berkshire and that culture is

going to remain consistent for the most part. But at some point, this is going to be a company under new management and under new guidance. And there will likely be some differing perspectives in regard to that. I mean, it's nice to see, obviously, with sherry purchases, a continued spring share count down. They did for a long time. I think they held that 1.2 times standard as far as buying back shares, right? 1.2 times book were lower. It was kind of that valuation perspective where they felt like it represented an opportunity. And then they changed that and said, hey, listen, we're just going to use our own guidance, right? We feel like we can, we know it when we see it, so therefore we'll do it.

And we feel like shareholders a benefit from this. You know, it's really difficult to say. I mean, they will continue, I think, to focus on surefire ways to return capital, like share repurchases. And as long as those share repurchases are bringing that share account down and then think, you know, shareholders can feel really good about that. But dividends, I mean, that's cash in the pocket. And, you know, when you hear talk of dividend kings and dividend aristocrats, I mean, Berkshire Hathaway is a business that could put itself in that position. Granted to achieve that status, it would take a lot of time because that's what is required. But it certainly has the business that is capable of achieving that over time.

Yeah, yeah, absolutely. Well, one of the things I found really interesting was his talk about utilities, pretty negative about future of utilities as investments, saying the final result for the utility industry may be ominous. Certain utilities might not no longer attract the savings of American citizens. And so it sounds to me like he's really seeing a dramatic shift there in, you know, utilities tend to be those steady investments over time. But he's saying based on what, you know, what we've seen in California, what we're seeing in Hawaii, utilities become increasingly dangerous, sounds like. It seems that way, you know, and you sort of have this different sort of way of looking at utilities between the public model and sort of the co-op or private model. I mean, I think about the utility company that I use here, that we use here in northern Virginia, it's,

Novec, right? It's a not-for-profit corporation. It's owned and controlled by the members, a.k.a. the customers like us who actually purchase our energy from Novak. He absolutely has seen and express some concerns in regard to the space. You mentioned the states there. Things that continue to change in the utility space, right? I mean, environmental concerns, regulatory concerns, the amount of capital that these utilities are going to require in the coming years. And so we're seeing this sort of trade-off, right, between sort of that private model versus the public model. And one may not necessarily be better than the other, but when you look at sort of this public model that he's pointing to, seeing more and more states kind of going this direction, it becomes really more about figuring out how to access that capital and less about

profitability, right? I mean, we do see utilities becoming really truly a utility. It's becoming more and more difficult for these companies to pass pricing along, right? I mean, increasing prices for the users doesn't necessarily result in a more profitable business in this case. And given sort of how we are seeing things play out going forward, right? Obviously, a lot of concerns regarding climate change and the way these utilities operate. It does feel like these utilities are set up for a much more challenging stretch going forward. So I think he's right to note that. Yeah, and it's interesting, you know, speaking a little bit about climate change and events.

So I want to sort of pivot and talk a little bit about the insurance industry because, I mean, Berkshire's so many things, right? It's everything from candy to rugs, you know, big investments in Occidental Petroleum, American Express, Apple, of course. But, you know, the driving engine of the company is insurance. And he said that he believes the insurance industry is going to experience what he called a a mega catastrophe. And so thinking about that mountain of cash again that Berkshire is sitting on, you know, he says,

you know, the insurance industry will have this gigantic moment, doesn't know when it's going to happen, but he says Berkshire will survive. They'll be open the next day. So it's an interesting situation to think about insurance. Fine for Berkshire, but does it make you worry a little bit about insurance as a, as a sector in general? As a sector, maybe. I mean, I think insurance is really hard, right?

I mean, I think just the business of insurance is really hard, figuring out, quantifying that risk, and then projecting it, forecasting it, and writing these profitable books of business. I mean, it's just really difficult to do really well over long stretches of time. And so, you know, there are a couple of quotes that come from the letter here that I think just really give us a good view into his mindset, right? He said at one point here in the letter, I quote, extreme fiscal conservatism is a corporate pledge we make to those who have joined us in ownership of Berkshire, end quote. And that actually could kind of go back to that dividend talk. We're having a little bit ago, too, right? I mean, he's just not so willing to go ahead and give up that cash out of pocket necessarily if he doesn't feel like he has to.

And right now, shareholders still haven't really demanded it of him. And a lot of that just kind of really, I think, is due to the performance of the business over long periods of time. They just did a very good job of managing risk year in and year out with Berkshire. But when you look at insurance itself, I mean, insurance is interesting. I mean, you've got the quality of companies really does run the gamut. And, I mean, having worked in the insurance industry before, I mean, I worked for one of the large reputable companies out there with a big red umbrella. I'll leave it to you to guess which company I'm talking about there, Diedra. But the bottom line was my experience with a lot of those businesses.

You would see your reputable players, right? The big, well-capitalized companies that were thinking longer term, there were a lot of companies that just didn't belong in that industry. And you could tell their lives were going to be very short because they just weren't writing good books of business. The service wasn't good. The coverage wasn't good. And so I think with insurance, you have to be very picky, right?

You do have to look for those companies that just have long demonstrated track records and performance. And when you look at Berkshire Hathaway, I mean, again, he pointed this out of the letter. I mean, the property and casualty insurance side of the business, I mean, this has just been something they have done so, it's been something they've done so well for so long. They've been in the business for 57 years and talked about a 5,000-fold increase in volume from $17 million to $83 billion. And they still believe they have a lot of room to grow. And I think that confidence stems from the fact that. that they've been so, so cautious, so particular about the books of business they've written

all along the way, right? So when you had that level of expertise, I mean, 57 years, that really does go a long way in this line of work. Yeah, good underwriting goes a long way. Well, I want to finish up with talking about another company that seems to have no trouble paying a dividend. Domino's Pizza reported today, solid results, a nice increase in same store sales. 25, percent increase in the quarterly dividend to $1.51 to share. Also, a billion-dollar share repurchase program. Interesting, because there's a concerning amount of debt with this company, but they're really making this move. And I'm seeing this shift toward dividends in general. But what do you think of this one?

Well, I do think, I mean, when you look at Domino's, they are in a good market, right? Pizza is pretty darn reliable. And no, I mean, they don't make the... best pizza in the world. They make good food, right? And they make good food that a lot of people want to buy, and the numbers bear that out. So, I think when you look at Domino's, you know, most of the debt that they have, it's in the form of low-rate notes that are staggered out very well over the course of time, all the way up to 2031. So the debt, while it may look like a large amount, it really isn't when you actually look at how it's staggered out, right? The coverage ratio, which looks at operating income over net interest expense, it's right there four and a half times, which is a very acceptable level for a company like this.

The payout ratios consistently in that 25 to 35% range. So they aren't really overstepping their bounds on the dividends that they're paying, right? The net income that the company generates can really fund that dividend okay. And then the repurchases, I mean, the share account is continuing to come down. You look at how the business is performing. The total return for this business has outperformed the market with the last five and ten-year horizons. And so I think in the case of Domino's, they've done a very good job of managing their capital position and balance sheet very well, making sure to return value to shareholders with both repurchases and dividends. It's nice to see them raise that dividend because I suspect that'll keep a lot of people on board.

Yeah, I think that's true. Well, thanks for your time today, Jason. Some of the best lessons don't come from a classroom. They come from experience. On The Power of Advice, a new podcast series from Capital Group, you'll hear from CEOs, investors, and founders about how they built careers, took risks, and reinvented themselves. If you're starting your own journey, this is the kind of advice you won't want to miss.

Available wherever you get your podcast. Published by Capital Client Group, Inc. We talk about a lot of stocks on the show. but it's just a peak at the Motley Fool's Investing Universe. This year, we're rolling out a new offering. It's called Epic Bundle. Service includes seven stock recommendations every month, model portfolios, and stock rankings,

all based on your investor type. We're offering Epic Bundle to Motley Fool Money listeners at a reduced rate as a thanks for listening to the show. So, for more information, head to Fool.com slash Epic. We'll also include a link in the show notes for you. Over the next decade, it's estimated that trillions of dollars will from baby boomers to millennials. What does this type of generational shift mean for the future of investing?

Ken Costa, author of the $100 trillion wealth transfer, explains what this could look like. Let's start with the title of the book. I've been calling it Great Wealth Transfer, but you put a dollar figure on it, a big dollar figure with $100 trillion. Why are that number? And how is the wealth transferring? So it's $100 trillion, $64 trillion of it in the U.S. and the rest in Europe and the rest of the world.

And the way in which it's transferring is people think, oh, well, maybe that's just in a very long time in the distance future. No, it's happening now because the bank of mum and dad and the bank of grandpa and grandma are already helping the next generation, putting down deposits for homes, being able to help with escalating rent everywhere in the world cities, and also helping on the college account. So we're already seeing that happening. In addition to that, it continues to grow as this whole period of the disposable income has increased in an era of low interest rates. Assets have gone up, and so people are making gifts of shares and bonds to that next

generation. So it's growing and it's just going to continue until we see this huge amount transfer. Well, it's fascinating because we have people living longer and I think younger people feel like they have more time to sort of ease into their financial life. They're staying at home longer. It's an interesting time period that seems a little different than other wealth transfers. Well, it's interesting, firstly because a generation is living longer. healthcare is better, but equally a next generation are becoming very much more savvy than a previous one because they have access to a large number of tools that give them an understanding of investment and how to invest. However, a taboo subject still exists between discussing succession

openly and discussing money openly. But what is important is that the two generations are able to talk together, because if they don't, we will have a conflict of generations rather than the cooperation of generations, which is what I am most concerned about. Yeah, I'm a little concerned about that, too. I'm also, the other criticism I've heard of the wealth transfer is that it's going to, it's going to accelerate the current financial inequalities of the world because it's going to concentrate wealth. You know, wealth, wealth, goes to wealth.

Is that something you're also looking at? Well, you know, the worldwide, there will be an increase in this in the wealth that a generation has achieved and its assets. But it is transferring. Yes, it will transfer to the next generation, which may be thought to be in that wealthy bracket. However, the fact of the matter is this next generation has got some very clear ideas as to how it wishes to see that wealth. spread in terms of having the financial capacity and the power to influence climate change, environment, justice, inequality, which are very important values to the generation. And I just add this, that one of the important things to look, a generation dies and then

the money goes to the next generation, that happens normally. But there are three very important distinctions. At the same time, not only is finance moving, but power is moving as well. And the next generation are empowered by technology as never before, and the speed of change of technology, which they've embraced and which are going to enable them to change the very ways in which we are living together, whether it's artificial intelligence or quantum computing, and the power going to them in terms of social media, where not only the social media at their fingertips, but able to influence even major corporations in the directions

in which they want to go. And when you add that to the agenda that they have, you see a situation that could easily become explosive. Well, one of the things you say in the book that I think contributes to that is so by 2030, all baby boomers will be at least 65 years old. At the same time, millennials are going to make up 75% of the workforce. So you've got these two massive populations going through this big life transition, and you've got those millennials taking power.

What does that set us up for? Well, that sets us up for either the clash of a generation or for the cooperation. And the way I put it is this. We need the hindsight of the boomer generation. we need the insight of the next generation who are seeing the shape of the world very differently from a previous generation, which would create a foresight to be able to anticipate the social, political and financial changes that are coming. Now, either we pull it together, and in the book I speak about co-being the answer to this

divide, you know, we know about co-investing, co-living, but the, big philosophical change is co-destiny as the working two generations working together to be able to know that we all have to live well on this planet. But equally, that millennial, or as I call them the Zenials, the millennials and the Gen Zs, they will be in positions of very real influence. And I would add this, it is interesting that. the view always was and was attributed to Churchill, I'm not sure that it was accurately attributed, that if you're not a socialist when you're 20, you have no heart, and if you are a socialist when you're 40, you have no head.

But I think that what is changing is that the Zenial generation, led by the millennials, have maintained their concern for society, for prosperity, yes, but also for purpose. They want to do good and do well at the same time. So I think that there is a major shift that they have maintained, rather than as a previous generation would have looked at, you know, for sort of financial reward as being the most important test. So as an investor, I'm always trying to figure out where the money is going,

where consumers are spending. So given this wealth transfer, What are you looking at in terms of how people spend? Are the same luxury brand still in play? What is the younger generation value in terms of how they spend? I mean, I think they look to authentic branding where they can trust the brand. An example would be Lulu Lemon in its athletic wear, if one can mention a company. they've built up a reputation that the generation is trusted, that they think the values are good,

and they think that whether that's true or not, I can't comment, but that's one of the growth. They know it's reliable and it's authentic. So I think authenticity in the brand is going to be a significant development for the generation as well. And we will see increasingly that sort of coexistence with where, you know, I want to know the provenance of where something has come from. And, you know, there's a slightly change to that, which is, how can you support the communities in which, or from which you have got your latest, whatever luxury brand it might be. So, yes, in a curious way, it's still brand conscious, but more discriminating about the brand and its problem.

As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have more recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Dieter Willard. Thanks for listening. We'll see you tomorrow.