Susan Dziubinski: Hi, I'm Susan Dziubinski from Morningstar.com. Berkshire Hathaway's annual meeting is this weekend. I'm here with Gregg Warren, a senior analyst at Morningstar who covers Berkshire, and who's among the analysts on the panel asking Warren Buffett and Charlie Munger questions during the event. Gregg, thank you for joining me today.
Gregg Warren: Thanks for having me.
Dziubinski: Now, let's talk about some of the main topics that you're expecting to hear about or that you'd like to hear about at this year's meeting. The first being cash; Berkshire was sitting on about $116 billion worth of cash at the end of 2018.
Warren: You kind of hit capital problem number one for Berkshire right now, is they're sitting on a ton of cash. If you go back to two years ago at the end of the meeting, Buffett explicitly said, I can't sit here three years from now with $150 billion in cash on the books and tell shareholders that that was a brilliant idea. So, putting that capital to work is sort of priority number one. The problem for Berkshire, though is being sort of an acquisition investment vehicle, trying to find opportunities for that cash has been pretty difficult, between the markets continuing to run up and a lot of money going into passive products, which kind of lifts all boats, there's been fewer and fewer opportunities like BNSF or Precision Castparts that have come along in the past. You've also got private equity right now sitting on a trillion plus in capital, and that's also driving up prices for deals Berkshire would traditionally do. So, when we look at Berkshire overall, go back a few years ago, we sort of noted the fact that eventually they're going to have to evolve from being this acquisition and investment vehicle into a returning capital and shareholders vehicle. We're not quite there yet. Some would argue we should've been there five or six years ago. But at this point now, they're going to have to find ways to return money to shareholders. Now, Buffett's been fairly explicit about not wanting to pay a dividend. I pushed and tugged at him a bit last year to try and get him to commit to even a special dividend, and he felt like it was pulling eye teeth. But share repurchases are something he's a little bit more open to. That said, we've not seen as much as we would've liked to have seen. Our expectation is they could do $2 billion to $3 billion a quarter and be fine, but Buffett just has this aversion to spending cash, especially if he thinks he can put it to work in something else. That said, in a recent interview with the FT [The Financial Times], he did note that they'd be willing to buy back a $100 billion in stock over time. Unfortunately, no real time frame was given for that. So, I'll believe it when I see it is sort of where I am with that.
Dziubinski: Well, maybe we'll hear a little more this weekend. Succession has been an ongoing issue and point of conversation when it comes to Berkshire, and Warren Buffett has said in the past that his three main jobs will be split among three people, not one person. What are your thoughts on succession today?
Warren: They made that notation, it was about six, seven years ago, about the fact that job would ideally be split into three different roles: a chairman role for the board, the CEO role, and the chief investment officer. On the chairman role, Buffett's already sort of made it plain that he would like to see his son Howard Buffett sit in that role. He sees it as being more of a safeguard of the culture, a safeguard of what has been built up over the years for Berkshire, what has sort of allowed it to evolve and be successful over time. And Howard is probably is best suited to do that. Plus, he'll have the backing of the trust, which will have most of Warren's remaining equity stakes once he passes on. That said, it's still a board of directors decision, so we'll have to see how that pans out over time. On the investment officer role, they were originally looking for anywhere from three to five people to sort of sit in that role of managing the investments. It seems now like Warren's pretty firm on just having Todd Combs and Ted Weschler, who he hired six, seven years ago to handle that part of the business. In fact, they've actually been doing more than just managing the investments. They've actually gotten their hands dirty, are sitting on boards of some of the companies, some of the subs that they run. So, they're getting more involved than just sort of managing investments. And then, on the CEO position, we've always felt that there were ideally two candidates for that role: Ajit Jain, who right now is running all of the insurance operations, and then Greg Abel, who came up through Berkshire Energy, who now oversees all of Berkshire's noninsurance operations. With Ajit, he's a little bit older, doesn't sort of fit that role Buffett's looking for, somebody that can run the business for another 20, 30 years. But that said, he's never really showed a big interest in wanting to run the business. I mean, who would want to follow in the footsteps of Warren to begin with? But he just has never been one to seek the limelight. So, from that perspective, I would be much, much happier if Ajit just continued to run the business on the insurance side. He loves the insurance business. He puts his whole heart into it, so from that perspective he's ideal to have there. Greg has a lot more operations and acquisition experience. I think he's a better fit for that role of chief executive, especially if you're just looking for a capital allocator and chief.
Dziubinski: What about Kraft Heinz? The company has been in the news a lot lately, and not in a good way necessarily. And it also announced, I think last week, that it was bringing on a new CEO.
Warren: Kraft Heinz is one of several deals that Berkshire did with 3G Capital, which is a private equity firm out of Brazil. Berkshire and Buffett have gotten a lot of flack from some shareholders in the past about that relationship because 3G's been known as being aggressive on cost-cutting and aggressive on letting people go, which is something that, historically, Berkshire has not done. So, it just really never really sort of fit with the Berkshire methodology. But Buffett's been content with it because he and Jorge Lemann, who's one of the founding partners of 3G Capital, they go back to the Gillette board days. And we're talking 30, 40 years ago. So, they've known each other for a very, very long time. And it's sort of fit an ideal situation for Berkshire, where they could act as the bank, provide the capital up front for these deals--and there's not just the Kraft Heinz, but it was Heinz before that, but they also had their hands in the Tim Horton deals, and a few other ones that 3G did--and let 3G run the businesses. Because for Berkshire, historically, Buffett has not wanted fixer-upper businesses, has not wanted businesses that come to him and need management, because that's just not his expertise. So, having somebody else do that for him was sort of ideal. So, this has sort of filled the role. That said, to look at Buffett after the writedown and sort of the comments he made afterward, he seemed to be fairly perturbed by the whole thing. He was not pleased with having to write down the business itself. He feels like they way overpaid for the business. And when questioned about whether he'd be buying more, he's like, well, I'm certainly not selling it right now, but I'm not interested in buying more at these prices. So, it seems to be a scenario where he's rethinking that situation, but we'll have to see how that pans out.
Dziubinski: And then lastly, Buffett's been a little reticent to discuss the impact, or the threat technology poses to Berkshire's businesses. Do you think this is an issue that he should be talking about more? That it is important for him to be discussing?
Warren: I'm not sure if it's true that he's not spoken about it. I just feel that he's been speaking to the side of it. He's mentioned the success that Jeff Bezos has had with Amazon, and the threat that Amazon poses to a lot of businesses, especially retail, when you look at what it's done to that landscape. But when you look at Berkshire's businesses overall, the ones that are more at risk to Amazon or other web-based businesses, are the apparel manufacturers and some of the retail businesses, and overall, it's a very, very, very, very, very small asterisk relative to what Berkshire's total pretax income is. My concern is that they're ignoring some of the stuff that perhaps is right in front of their face. Like the growth and acceptance of telematics in the auto insurance business, which Progressive seems to be getting a better pick of customers from adopting that early. The use of precision scheduling in the railroad business; we've seen massive improvements in operating profitability for almost all the other Class 1 railroads, and BNSF has been sort of hesitant to adopt this technology. And then when you look on the energy side of the business, the distributed energy business, where people are using solar or wind to sort of capture energy for their own homes and then pushing it back or selling it back to the utilities, is a longer-term threat, and we've not heard as much discussion about what they're doing to sort of combat that. So, those are the things I'd be more interested in hearing more about because, again, when I look at their retail business, most of it is housewares and furniture, which is not as at risk as, say, apparel and other things are. But eventually they could be.
But the key thing here is that I would like to see them focusing more on how they're addressing it throughout the portfolio, as opposed to just sort of the obvious threats.
Dziubinski: Thank you so much for your insights today, Gregg. We look forward to your report shortly after the event on Saturday.
Warren: Thank you for having me.
Dziubinski: I'm Susan Dziubinski from Morningstar.com.
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