Over the weekend, Berkshire Hathaway released Warren Buffett’s annual letter to shareholders. Each year, the legendary investor shares his wisdom for all to read. Here are two points from the latest letter which I found interesting as a UK investor.
Finding value in the current market
What struck me most about the letter is how quiet Buffett was about his activities over the past year. He spoke less about looking for major acquisitions than he has done in recent years. But he also didn’t talk much about opening new holdings in listed companies. Indeed, the share purchase he talked most about was one in his own company.
So, Buffett appears to feel that Berkshire Hathaway is undervalued by the stock market. But he doesn’t seem to feel that there is much value in the sorts of companies he likes in the wider market. However, I did notice some changes in Berkshire’s list of largest shareholdings. For example, it now contains pharma names such as Merck and AbbVie. That suggests that over the past year, Buffett has seen opportunity in the pharma sector. Drug patents and distribution networks form the sort of economic moat Buffett likes in a business.
Shares in British pharma GSK continue to trade close to their lowest price for years. GSK has signalled a coming dividend reduction, and the market is nervous about the company’s drugs pipeline. But Buffett’s growing position in pharma made me wonder if shares like GSK might currently offer significant value. Buffett didn’t mention GSK, but his renewed enthusiasm for pharma blue chips has put GSK on my watchlist again.
Warren Buffett’s annual letter on share buybacks
A lot of discussion in Warren Buffett’s annual letter concerned share buybacks. That is where a company buys its own shares and cancels them. By reducing the total number of shares in circulation that way, the company effectively increases the proportion of the company owned by each share. As Buffett said, “The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses”.
The numbers can look small by share, but the bigger picture shows the potential significance. For example, due to an Apple buyback, Berkshire’s stake in Apple actually grew in recent years even though it sold millions of Apple shares.
Buybacks elicit mixed reactions. Buffett’s annual letter set out how they effectively increase one’s stake in a company. But some investors would prefer a company to put the money to use to grow a business or pay a dividend, rather than buying their own shares. This is a question I am considering when looking at bank shares. Last year when dividend payments were restricted by the UK’s banking regulator, so were buybacks. But buybacks are now allowed again.
My holding in Standard Chartered is under water. In its recent results, the emerging markets bank announced a $254m buyback. Does that signal that it doesn’t see better opportunities to deploy that cash in its growth markets? Buffett sees some buybacks as creating value. But they also provide an investor with a moment to consider why a company thinks a buyback is the best use of the money involved. For Standard Chartered, I regard it as negative that they can’t deploy the $254m more profitably in growing the business.