- Berkshire Hathaway’s success is attributed to Warren Buffett’s investment prowess and investors are concerned about a post-Buffett era.
- Investing its cash flow and cash hoard at attractive rates of return is a big task for Buffett’s successor.
- Hiring Todd Combs and Ted Weschler as investment successors highlight Berkshire’s future focus: banks, insurance and opportunistic deals.
Warren Buffett, CEO of Berkshire Hathaway (NYSE:BRK.A), Berkshire (NYSE:BRK.B) may not be stepping down soon. At age 85, he still remains active at the helm of the $360 billion conglomerate. From 1965 to 2015, the company’s book value per share has increased 19.2% on a compounded basis.
The outstanding 50-year performance is mostly attributed to Mr. Buffett’s superior capital allocation skills and market insights. He consistently invested in companies with durable competitive advantage at reasonable prices in order to achieve this feat. Conclusively, it is fair to assume that majority of the premium reflected in the stock price of Berkshire Hathaway could be attributed to him.
Every year, investors get nervous over Berkshire Hathaway’s future after Warren Buffett. The 5-year average cash flow has been around $26 billion a year and it is expected to be higher with the addition of more companies in the group. There are real concerns whether these cash flows will be invested in sub-par companies without Mr. Buffett managing these cash flows. In addition to that, managing Berkshire Hathaway’s $141 billion portfolio is a towering task for any investment manager.
Capital allocation best practices call for a dividend distribution or share repurchase if the company’s managers could not re-invest the cash flows at attractive rates of return. If Mr. Buffett could not find a worthy successor, investors would expect that there would be more dividend payouts from the company in the future.
Investment Rock Stars Named Ted & Todd
Fortunately, Mr. Buffett was able to bring in two investment managers to Berkshire Hathaway: Todd Combs and Ted Weschler. Both Combs and Weschler seem to have the qualities that fit with the Berkshire culture. In fact, these investment managers both had been successful hedge fund managers prior to joining Buffett. Over the last years, Mr. Buffett seems pleased by the performance of his protégés and gave them bigger roles to play in various transactions.
Their background speaks volume of Berkshire’s future thrust. Todd Combs’ experience as a bank regulator and insurance pricing analyst reflects Berkshire’s emphasis on a strong risk culture as well as continued investments in insurance businesses and financial institutions.
On the other hand, Ted Weschler has closed complex transactions, including restructuring, mergers and reorganizations. This could mean that Berkshire could play a big role being the front-runner in various opportunistic deals.
If Berkshire Hathaway has to continue growing its intrinsic value in the future, it needs to continue scooping up value-enhancing transactions and stock picking. Mr. Buffett’s lieutenants appear to have the required skills and temperament to bring in better rates of returns. While the whole market is still focused with the so-called “Buffett premium,” it may not be too long before they priced-in his two eligible lieutenants who have their hands busy on the billion dollar Berkshire cash hoard.