Berkshire: Shareholder Value Generation

| About: Berkshire Hathaway (BRK.A)

Berkshire Invests In Ownership

When the stock market fell to its knees 3 years ago, Berkshire Hathaway (NYSE:BRK.A) hit a low around 73,000 dollars a share in March 2009. During this period of time Berkshire aided and invested in Goldman Sachs (NYSE:GS) and General Electric (NYSE:GE). Berkshire Hathaway did not need to be rescued; on the contrary, Berkshire was the knight who saved others.

Now Mr. Buffett is talking about buying another company for $22B. He invests in valuable and efficiently run companies that produce income. Then Berkshire generates shareholder value by investing the income into itself (through share buybacks) and more businesses' equity and debt.

berkshire 10 yr chart

Twenty years ago Berkshire was 9,100 dollars a share; today it is around 120,000 dollars a share. The stock is up 50 percent in the past ten years.

Some businesses simply are unable to make money, let alone make money for shareholders. Some pay their CEOs over 12 million dollars while shareholders are losing money. So call Warren Buffett old fashioned if you wish, but there is one thing he has been doing for nearly a half century - making money for shareholders.


Let's look at the past three years' gross profit:

Source: Yahoo! Finance Income Sheet

That is 111.86 billion dollars in gross profit in 2011. The result of a controlled and effective philosophy of managing and earning money.

Let's compare Berkshire's gross profit to Wal-Mart's (NYSE:WMT):

Source: Yahoo! Finance Income Sheet

Again, that is 111.82 billion dollars in gross profit. Keep in mind that Berkshire owns 39 million shares of Wal-Mart.

Journey to the Center of the Financial Universe

You may not be able to add Berkshire's Class A shares to your portfolio because they cost 120,000 dollars a share. However you can add a few shares of Berkshire (NYSE:BRK.B) Class B shares, priced around 81 dollars a share.

For one strategy check out my article, Strategic Investing In Equity And Debt: Target 2042. Now let's look at a nearer term strategy centered around Berkshire Class B (this strategy is for value not income.) Let's add ConAgra (NYSE:CAG) and the new Facebook (NASDAQ:FB) stock to the portfolio.

Stocks Shares Price Dividend/Yr Years Total Income
Berkshire Hathaway 10 81 0 9
ConAgra 10 25.75 0.96 9 86
Facebook $500 worth X 0 9

Sprott Physical Gold Trust (NYSEARCA:PHYS)

10 14.14 0 9
Income Fund
Wells Fargo Advantage Utilities and High Income Fund (NYSEMKT:ERH) 25 11.53 0.90 9 202
Berkshire Hathaway 3.25% 8/15/2021 (CUSIP: 084670BC1) 2 106.62 2.928% 9 585

This totals 4,128 dollars (and 40 dollars in commission). If you set your dividends from ConAgra and Wells Fargo's Income Fund to reinvest, they should begin to yield more. Once the Income Fund has grown some, set the dividends to pay cash.

Currently yields are low, quality stocks are expensive, and advisors are taking on more risk in an effort to make money. Several advisors overlook Berkshire, though, even while the company makes and invests billions.

This strategy involves building a safety net around your Berkshire stock. Here's a description of the securities:

Berkshire Hathaway

Berkshire owns GEICO insurance, See's Candy, Wrigley and has major investments in Coca Cola (NYSE:KO), Procter & Gamble (NYSE:PG) and Johnson & Johnson (NYSE:JNJ) to name a few. A few key executives in Omaha oversee an empire of investments.

Berkshire employs 271,000 people and has a 201.7 billion dollar market cap.


ConAgra makes packaged foods like Healthy Choice and diversifies this portfolio. The stock is still well priced under 26 dollars a share. Like Berkshire, ConAgra is based out of Omaha, Nebraska.

ConAgra has 10 billion market cap., with 604 million dollars in cash and 3.02 billion dollars in debt.

Facebook Buffett recently anounced he does not plan to invest in Facebook's IPO. So this position exposes the portfolio to the newer social media giant. Consider a 500 dollar investment the week after Facebook goes public when the price stabilizes (or a few months down the road once insiders have profited.)
Sprott Physical Gold Trust Berkshire's Charlie Munger has criticized gold extensively, (every few months he goes on about it.) However for the near term or long term some gold can provide balance.
Income Fund
Wells Fargo Advantage Utilities and High Income Fund

Wells Fargo's Closed-End Income Fund is trading right at its NAV of 11.53. Check the funds holdings to determine if they fit your investment criteria.

Berkshire Hathaway is the top holder of Wells Fargo (NYSE:WFC) stock.

Berkshire Hathaway 3.25% 8/15/2021 Berkshire issued these 10 yr bonds on 8/15/2011. The 500 million dollar bond offering raised money to refinance debt from the Burlington Northern deal.

A Different Point of View

The article Waiting On Warren: Berkshire Hathaway No Longer Shows The Way contends that Berkshire is not guiding the world of investors. However, the Berkshire portfolio does seem to do just that and appears focused on building value for shareholders.

A poker player will not show everyone their hand, and neither should the CEO of one of the largest companies in the world. That is not the way it works. If instead you want to understand one way to succeed in business, look to Berkshire Hathaway and to the generation of value for shareholders.

Disclosure: I am long BRK.B, WMT, GS, GE, PG, JNJ, KO, WFC, CAG, PHYS.

Additional disclosure: I have no position in ERH however may initiate a long investment.

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