As usual there was an awful lot from the Berkshire Hathaway AGM in Omaha on the weekend. From investment – passive investing was praised, to tax and the Trump healthcare package which was criticised, to the company’s holdings in Wells Fargo, IBM and political donations – the hours of comment and questions covered an awful lot.
The day before the company produced its first quarter results (see separate story) which fell from a year ago for a number of reasons, including the early cost of Cyclone Debbie in Queensland ($US52 million).
And two days before the meeting Buffett had revealed he had sold a third of Berkshire’s shares in IBM, one of the four so-called pillars of his company’s massive investment portfolio.
But for long time watchers of Buffett, perhaps the most tantalising point to emerge, was a stronger suggestion of a dividend – either by way of a cash payment or capital management.
Buffett told the meeting Berkshire could pay its first dividend since 1967, “reasonably soon, even while I’m around.” He said the company had too much cash it could not reasonably deploy.
“When the time comes—and it could come reasonably soon, even while I’m around—and we really don’t think we can get the money out in a reasonable period of time into things we like, we have to reexamine, then, what we do with those funds," Buffett said. "
And at that time that we make a decision, it might include both, but it could be repurchases, it could be dividends,” he told the meeting.
Berkshire Hathaway has previously said it was willing to do share buybacks, but dividends would mark a huge change of heart from just a few years ago, when Buffett had opposed a shareholder proposal calling for Berkshire Hathaway to start paying them. He has always said that he can make more money for shareholders by investing it than giving it back.
But the cash pile on his balance sheet is obviously weighing more heavily on him and his managers.
"We don’t like that and we shouldn’t use your money that way for a long period of time," he said at the meeting. “ There’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more and we think we’re doing something brilliant by doing it."
And if Berkshire does decide to pay dividends, it would have to commit to maintaining that payout over time, Buffett said, as cutting it could have disastrous consequences for the company’s share price.
Berkshire in fact ended March with more than $96 billion of cash and cash-like instruments, and Vice chair Charlie Munger said it could do a “$US150 billion” acquisition now if it wanted.
In fact the quarterly report revealed that the ‘float’ (suplus cash Berkshire had on hand had risen to $US105 billion at the end of March following the $US10.2 billion upfront payment from insurer, AIG as part of a deal to take unwanted insurance claims off AIG.
For years Buffett has defended not paying a dividend by pointing to the capital gans his company had been racking up. Last year the shares rose more than 23%, almost twice the rise in the S&P 500 (plus reinvested dividends) and the 10.7% rise in the book value of Berkshire Hathaway shares.
Buffett also used the meeting to criticise US bank, Wells Fargo & Co for failing to stop employees from signing up customers for bogus accounts even after learning it was happening, causing a scandal which is still impacting the bank.
Wells Fargo, whose largest shareholder is Berkshire with near 10% stake worth roughly $US27 billion, gave employees too much autonomy to engage in “cross-selling” multiple products to meet sales goals, Buffett told the meeting.
This “incentivized the wrong type of behaviour,” and former Chief Executive John Stumpf, who lost his job over the scandal, was too slow to fix the problem, Buffett said. Other executives and directors lost their jobs (there have been three new directors brought in to the board in recent months).
Berkshire voted its near 10% stake in favour of the board at the bank’s AGM on April 25 and prevented stunning no votes against the board from disaffected shareholders of all sizes.
"If there’s a major problem, the CEO will get wind of it. At that moment, that’s the key to everything. The CEO has to act," Buffett said. “The main problem was they didn’t act when they learned about it,” he said of Well Fargo.
But he didn’t quite face the real problem in that this miss-selling was offical management and board policy and staff were only following orders (and complaining about it without anything being done as a result of those complaints to international company hot lines).
The meeting also included discussions about Berkshire’s succession plans, its controversial partnership with Brazilian firm 3G Capital in big food group, Kraft Heinz.
Buffett has said Berkshire could have a new chief executive within 24 hours if he died or could not continue, and that nothing had changed just because he praised fewer managers than usual in his February shareholder letter.
He said it may have been harder to single people out because “we have never had more good managers."
But he also said it would be a “terrible mistake" if capital allocation were not the "main talent" of his successor.
On 3G, with which Berkshire controls Kraft Heinz Co and tried to merge it with Unilever Buffett revealed to the meeting a dislike for the cost-cutting for which the Brazilian firm is known.
But, he said, “it is absolutely essential to America that we become more productive, and 3G was “very good at making a business productive with fewer people.”
Buffett also defended Berkshire’s foray into airlines, where it is a top investor in the country’s big four carriers, American Airlines, Delta Air Lines, Southwest Airlines Co and United Continental Holdings.
Buffett has long been wary of the airline sector and its ability to go broke. But he told the meeting that he is now confident it will not resort to “suicidally competitive” pricing strategies that could spell doom.
Vice chairman Munger reminded the meeting “you’ve got to remember railroads were a terrible business for decades and decades and decades, and then they got good.” Berkshire bought the BNSF railroad in 2010.
(But BNSF has suffered weaker profits since oil production fell and coal shipments dropped to power stations and other users because more gas was being used in those stations and by those customers).
And on his surprise change of heart about IBM, Buffett admitted he was wrong to think IIBM “could do better” when he started amassing 81 million shares six years ago.
Buffett said late last week that Berkshire recently sold about one-third of those shares even as it built a huge stake in Apple Inc, which Buffett said is more as a “consumer” company than a technology company.
Apple is today one of the Berkshire’s biggest equity holdings. "We do view Apple and IBM differently — Apple more of consumer business, IBM has more to do with products. We got it wrong on IBM and will find out whether we are wrong on Apple," Buffett said.
And in comments that suggested a change in Buffett’s outlook on the technology sector, Buffett said he regretted not investing early in Google. "Our biggest tech failure was missing Google. Walmart and Google were missed opportunities," he said.
Shareholders overwhelmingly rejected a proposal that would have required Berkshire to disclose its political contributions twice a year.
