Berkshire's Washington Post Stake: A Testament to Both Stocks' Value

Includes: BRK.A, BRK.B, GHC
by: David Kass

Warren Buffett announced on January 20 that he will not be seeking re-election to the Washington Post (WPO) Board of Directors at its annual meeting in May. Buffett has served on the Post’s board for 26 of the past 37 years.

Buffett's company, Berkshire Hathaway (BRK.A, BRK.B), is the largest outside shareholder, holding 1.73 million shares which represent approximately 21% of the Post’s common stock. The shares closed January 21 on the New York Stock Exchange at $434.11, valuing Berkshire’s stake at $750 million.

Over time, Buffett has served on the Boards of Directors of 19 firms. After he steps down from the Post’s board, Buffett will be on the board of only Berkshire Hathaway, where he is the chairman and chief executive officer.

Buffett was quoted by The Wall Street Journal as saying:

We’re going to keep every share of stock we have. I would never sell a share of the Post.

As a guest speaker at the Robert H. Smith School of Business at the University of Maryland on October 20, 2009, Don Graham, Chairman of the Board and CEO of the Washington Post Company, reminisced about the long and extremely fruitful relationship both he and his mother, Katharine Graham, have had with Warren Buffett dating back to 1974.

Don Graham’s comments included the following:

In 1974, when the stock market was at a once in a generation low (“similar to March 2009”), Warren Buffett bought 11% of the Post’s shares because the value of the Post’s assets far exceeded its market value. Buffett then sent a letter to Katharine Graham informing her of his purchase. Since she had not heard of Warren Buffett, she immediately tried to find anything she could about him. Ms. Graham then flew out to Omaha to meet with Buffett and his associate Charlie Munger. When she returned, she said they were the two smartest people she had ever met and wanted Buffett on the Post board of directors. Buffett has served on the Post board from 1974 to 1986 and from May 1996 to now.

Whenever Katharine Graham or Don Graham have needed advice on difficult decisions, they have reached out to their board of directors and have contacted them prior to regularly scheduled board meetings. Buffett is the “lead director” and is contacted first and more often than the other directors. Buffett over the years has given invaluable advice to both Katharine and Don Graham, which has included:

  1. The primary responsibility of a CEO is to allocate capital.
  2. When the Post was substantially undervalued in the mid-1970’s, Buffett recommended the Post buy back its stock, which it did. (The number of outstanding shares was reduced substantially such that Buffett’s original 11% investment today represents 21% of the Post.)
  3. Buffett recommended that the Post’s defined benefit pension plan be invested with one or two outstanding investment managers instead of with another manager where a majority of corporate pension funds were being invested and earning average market returns in the 1970’s. The Grahams accepted Buffett’s advice. Don Graham mentioned that the Post has not had to make any additional contributions to its pension plan since then, and he estimated that the Post has saved over $1 billion as a result. According to Buffett, a strong pension plan where you do not have to inject capital every year is like having another strong business within the company.

Buffett also taught the Grahams the importance of patience with respect to mergers and acquisitions. Most mergers do not work out. It is important to wait for the right opportunity. For example, Don Graham mentioned that in the fall of 2008 Buffett invested $5 billion in Goldman Sachs (NYSE:GS) 10% perpetual preferred and warrants. He receives $500 million per year in dividends and has created $2.5 billion in value for Berkshire shareholders (based on the value of Goldman Sachs warrants at that time).

Warren Buffett was sitting on $30 billion of cash waiting for the right opportunity.

Don Graham's description of the sound advice and wisdom provided by Warren Buffett over the past 37 years further enhances Buffett's image not only as an outstanding investor, but also as a superb corporate manager. This provides further evidence of the desirability of investing in Berkshire Hathaway (BRK.A, BRK.B). At BRK.A’s closing price of $120,526 on January 21 (or $80.45 for BRK.B), these shares are trading at approximately a 20% discount from their 2007 all-time high. In addition, Berkshire Hathaway is trading at a relatively low 1.3 times book value as compared to an average 1.6 times book value over the past 10 years.

Since Buffett has no plans to sell any of Berkshire's 21% stake in the Washington Post Company, and he will continue to provide his advice when asked, a good argument can also be made for investing in WPO. The Washington Post's current price is less than ½ its all-time high reached in December, 2004. However, its for-profit education business, which represents 2/3 of total revenues and a majority of its profits, has recently come under industry-wide regulatory scrutiny which could have a materially adverse effect on future earnings.

But on a positive note, Warren Buffett, who has supported The Post’s diversification into its Kaplan education division, was quoted in The Washington Post (January 21) as follows:

If it deserves to grow, it’ll grow. We're in the early stages of the for-profit industry.

On January 20, WPO increased its annual dividend to $9.40 from $9.00.

Disclosure: I am long BRK.B, WPO.

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