Berkshire continues to gravitate toward stodgy value-oriented sectors and away from growth stocks.
This has been another great year in the stock market, with the broader indexes roaring to new highs. But Warren Buffett’s commentary from Berkshire Hathaway‘s (BRK.A 2.24%) (BRK.B 1.99%) annual shareholder meeting and changes to the company’s public equity holdings indicate that Berkshire isn’t a net buyer in today’s market.
Berkshire has cut its stake in its largest public equity holding, Apple, by nearly 50%, trimmed its position in Bank of America, and more. In total, Berkshire has sold over $100 billion in stock this year and has built up a cash and Treasury bill position of over $300 billion.
However, Berkshire seems to remain confident in the utility and energy sectors, as evidenced by its sizable positions in Chevron and Occidental Petroleum, as well as a decision to buy the remaining 8% stake in Berkshire Hathaway Energy (or BHE, for short) — giving Berkshire total control of the entity.
Here’s a primer on how Berkshire Hathaway Energy fits into the broader business, the benefits of investing in dividend-paying utility stocks, and a low-cost exchange-traded fund (ETF) that’s worth considering now.
Image source: Getty Images.
BHE fits nicely into Berkshire’s public and private portfolio
Berkshire is known for its public equity holdings. But a ton of additional value is baked into its insurance businesses, ownership of BNSF railroad, BHE, and other business units. Berkshire loves boring businesses that make money and can steadily grow earnings and their dividends — like Coca-Cola and American Express. BHE embodies this philosophy.
BHE contains various electric and gas utilities, pipelines, and other infrastructure assets. Its domestic regulated energy interests include four regulated U.S. utility companies and five U.S. integrated natural gas pipelines with 21,000 miles of operated pipeline, among other assets.
Unlike the exploration and production or refining side of oil and gas, whose profit margins are heavily dependent on oil and gas prices, the midstream oil and gas industry functions like a toll road — charging fees to move energy products across the country from areas of production to areas of consumption or export.
Regulated utilities work with government agencies to set prices that are fair to consumers. This can give utilities a return, allowing them to invest in more infrastructure and pay dividends to shareholders.
Investors can buy shares of Berkshire Hathaway to gain exposure to BHE. But a simpler and more direct approach may be to buy an ETF with broad-based exposure to the utility sector.
The utility sector could have room to run
The Vanguard Utilities ETF (VPU -0.15%) mirrors the performance of the utility sector. The fund is up an impressive 27.8% year to date — besting the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average.
VPU data by YCharts
The Vanguard Utilities ETF features an expense ratio of 0.1%, has a minimum investment of just $1, and yields 3%. Even after its run-up, it still sports a somewhat reasonable price-to-earnings (P/E) ratio of 25 — which is lower than the S&P 500 but high for a traditionally low-growth sector.
The sector has been a beacon of safety for value investors seeking passive income in an otherwise expensive market. But after its surge, investors may wonder if it is the best sector to buy now.
Context is critical in the stock market. The utility sector was down slightly from 2020 through the end of 2023 — lagging the broader indexes by a wide margin during those four years. So its recent rebound may be partially due to the sector being oversold.
Furthermore, higher demand for computing to power artificial intelligence models could be a boon for electric utilities and justify infrastructure investments.
Lower interest rates are adding even more fuel to the fire. The Federal Reserve just cut interest rates for the first time in four years. Lower interest rates reduce the cost of capital and increase the potential return on investment for capital-intensive projects, such as power generation, transmission, and distribution.
Many utilities also carry a significant amount of debt on their balance sheets. Lower borrowing costs could help these companies refinance debt and reduce their interest expense.
A boring yet effective way to boost your passive income stream
The utility sector isn’t the bargain-bin buy it was at the beginning of the year, but it remains a solid sector for passive income-oriented investors. The year-to-date gain looks massive and overextended at first glance, but a good amount of that is due to how beaten down the sector was going into the year.
Investors looking for safe, reasonably valued pockets of the market may want to consider the Vanguard Utilities ETF as a simple yet effective way to achieve diversification in the utility sector.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
