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Stories are starting to appear that "my pal Warren" is gearing up for a major foreign acquisition. One of my dear friends Randy S. is taking a post graduate business class at UCLA where this issue is a part of the course. He is supposed to figure out what non US companies Berkshire Hathaway (BRK.A/BRK.B), led by Warren Buffett, might be considering for investment.Ahh yes, the prediction business, quite tricky indeed. Starting with some basics, in most cases I would stick to the time tested philosophy that past performance is not an indicator of future success. That said, I think in the case of Buffett, it does. There are many clues along the trail based on his past performance.
Here are some basic consistencies from the existing portfolio that I would expect to hold true going forward.
Most of the companies that have been acquired by Berkshire, in whole or in part, with almost no exceptions, pay dividends. This includes the foreign investments like PetroChina Company Limited (PTR), which he bought and sold for a substantial profit, and Posco (PKX) the Korean steel giant, a more recent acquisition. It is entirely possible that Posco could be the benefactor of an increased investment by Berkshire. It is 35% off its 52 week high of $150.50, currently trading in the high nineties. It may only be a coincidence, but his most recent buy of an entire company was Iscar, the Israeli specialty steel fabricator. -- more steel, hmmm.
Continuing the dividend theme, older US stock holdings include American Express Company, (AXP), The Coca-Cola Company (KO), and Johnson and Johnson, (JNJ). He has been building positions in Wells Fargo Company (WFC), Home Depot, Inc. (HD) and Lowe's Companies, Inc. (LOW). All of these pay dividends too.
Berkshire does not pay a dividend because "my pal Warren" has been able to exceed the return on investment of his shareholders through the company at a greater rate than they could do with any distribution. Since there is no dividend, any dividend distribution by an acquired company defers back to the bottom line of Berkshire.
There are other common themes between all the companies I have mentioned so far. His investment strategy excludes companies that produce something or provide a service in some area that he cannot be certain will be around decades later. Clearly things like chocolate, ice cream, paint, beverages, electricity, insurance, and now rail roads meet that criteria. This is why he has always shunned technology stocks. They require invention, led by heavy commitments of capital in research and development and usually do not pay any dividends.
The search for Buffett's next moves will exclude non dividend paying stocks and stocks highly dependent on invention. This search is part of a Serious Money series, stay tuned.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He own shares of BRK.B, JNJ, PTR and WFC.
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