Berkshire Hathaway has all the characteristics of being an excellent long-term investment.
Warren Buffett has famously said his favorite holding time is “forever.” I’ve bought into that mentality. I hardly ever sell stocks.
So, it should come as no surprise that I have no plans to ever sell my shares in Buffett’s company, Berkshire Hathaway (BRK.A 1.34%) (BRK.B 1.35%). While his presence plays a role, it’s not one of the top three reasons I plan to hold shares for the rest of my life. Here’s why Berkshire Hathaway is a forever stock for me.
1. Massive cash position
Berkshire Hathaway is a financial fortress. The company ended the second quarter with a staggering $277 billion of cash on its balance sheet. That was a meaningful increase from its prior record cash balance of $189 billion at the end of the first quarter. Berkshire boosted its cash balance via its strong operating cash flow and the sale of stocks, including nearly half its stake in tech giant Apple.
Buffett and his management team would love to deploy that money into compelling investment opportunities. However, it’s not burning a hole in their pocket. At the company’s annual meeting in May, Buffett told investors, “We won’t spend it unless we think [a business is] doing something that has very little risk and can make us a lot of money.“ Right now, “things aren’t attractive.“
I love this discipline. It will enable Berkshire to strike when the right opportunity comes along. That should allow it to create more value for investors in the long term than if it made an acquisition just to do something when valuations are less attractive.
2. Cash-gushing operating businesses
Berkshire Hathaway has a diversified portfolio of wholly owned operating businesses. The company has insurance operations (including GEICO), BNSF Railway, Berkshire Hathaway Energy, and an array of other companies, including various manufacturing, service, and retail operations. Berkshire hires strong, independent management teams for each business to grow its operations.
The company’s operating businesses generate strong and growing earnings. Berkshire’s operating earnings were $11.6 billion in the second quarter, up 15% from the prior year. The conglomerate retains 100% of its earnings, which it uses to grow shareholder value by repurchasing its stock, acquiring additional operating businesses, and buying stocks in its investment portfolio. The company has an excellent record of reinvesting the retained earnings of its operating companies to make more money for its shareholders.
3. High-quality investment portfolio
Warren Buffett and his management team use a portion of the company’s retained earnings to invest in publicly traded companies. Its stock portfolio currently totals over $315 billion, which is roughly a third of the company’s market capitalization. Notable investments include Apple (28.7% of its investment portfolio), American Express (12.2% of its investment portfolio and 21.3% of the credit giant’s outstanding shares), and Occidental Petroleum (4.6% of the portfolio and 27.9% of the oil company’s outstanding shares).
Berkshire Hathaway’s investment portfolio provides it with dividend income, a source of liquidity (it can sell shares to raise cash), and upside potential from stock price appreciation. Buffett and his team have done an excellent job identifying undervalued stocks with attractive total return potential. I believe Buffett’s team can continue identifying great investment opportunities long after he’s gone. These investments should enable the company to grow more value for shareholders than if Berkshire returned that money to them via dividends or additional repurchases.
A great forever stock
Berkshire Hathaway is a great company. Warren Buffett and his team have built a strong portfolio of operating businesses that generate growing earnings the company retains to enhance shareholder value. Buffett’s team does that by acquiring other operating businesses and investing in publicly traded companies. The company currently has a massive cash pile, giving it lots of money to boost shareholder value when the right opportunities arise. These high-quality features are why I plan to hold shares of Berkshire Hathaway for the rest of my life.
American Express is an advertising partner of The Ascent, a Motley Fool company. Matt DiLallo has positions in Apple and Berkshire Hathaway and has the following options: short November 2024 $250 calls on Apple. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
