On April 30, the day of his annual charity lunch and also his 88th birthday, Warren Buffett sat down for a 22 minute interview with CNBC's Becky Quick. Normally, you get little nuggets of valuable information from Buffett twice a year, on the day, his Shareholder Letter is released, and again, at the time of the Berkshire (BRK.A)(BRK.B) annual meeting. Barring a moment of crisis or extreme opportunity, real Buffett revelations are sparse.
This birthday interview - see the transcript here and the actual YouTube version here - proved to be an exception. Kudos to Becky Quick, who knew which important questions Buffett might answer and got revealing and expansive answers to several of them. She persuaded him to provide more information than she probably expected on three specific subjects which are of great interest to many investors. They are, as I see them, Apple (AAPL), Berkshire valuation, and - to me, the most important bit of information - his current view of companies built around packaged goods brands.
Along with three specific gems, Buffett provided a valuable tour d'horizon of the current economic and market situation. Markets are not cheap, he implied, but stocks are still better than bonds or any other asset class, and he is still buying. The economy is smoking. Inflation is increasing, and Berkshire can feel its effects in such items as the price of newsprint and paint cans - a fact of possible interest to investors in the home building and home improvement areas.
This answer was in response to a question about tariffs and trades, for which, the short answer was that, at this point, tariff effects are hard to separate from general inflationary tendencies. Buffett also expressed confidence in Jay Powell and the Federal Reserve.
The most important information in the interview came from specific answers which lent themselves to a bit of reading between the lines.
1. On Apple
Buffett's paean to Apple laid out what must have been the essence of his thesis when buying it. The obvious lead is that he sees Apple as a consumer company with a powerful and still very vital brand, not a tech company. He could have made, and did make, the same arguments about Coca-Cola (KO) thirty or forty years ago, and his judgment was borne out. For Buffett, the essence of Apple is brand power that has a firm grip on an enormous number of consumers. He doesn't see Apple's brand power diminishing anytime soon.
Buffett is a resolute non-techy, but he waxed eloquent about the utility of his Apple products, the iPhone and iPad. His pithy summation was that he would rather do without his million-dollar-a-year airplane than his thousand-dollar iPhone, saying that you can spend a thousand dollars on a dinner party. This comparison happened to reach me on the weekend I am replacing my old iPhone, and (gadget phobic as I am) the message struck home with the ring of truth. An iPhone is a bargain compared to many other expenditures.
Most interesting, however, was Buffett's revelation that he himself was responsible for all but about a billion of Berkshire's current $55 billion Apple position. He revealed that he had bought it first, hand over fist, around $100 but had also bought it vigorously much higher. He added that, recently, he had bought only "a little." That probably tells you more than dozens of articles packed with detailed analysis. Apple was, to Buffett, very cheap two years ago, was still pretty cheap over the past year and is pretty much fully priced but not overpriced right now.
2. On Berkshire Buybacks
In a direct response to a direct question about buybacks of Berkshire shares, Buffett stated that, yes, he had bought back "a little." That is a huge revelation. That means that he was almost certainly buying back Berkshire shares around $203, which is about 140% of stated book value as of the recent second quarter report.
First of all, that's a major jump from the previous 120% of BV. More importantly, Buffett believes that Berkshire is worth significantly more than 140% of book, enough more to provide a margin of safety. He confirmed this extrapolation by reminding that a company is run for its continuing shareholders, and buybacks should be priced so as to serve their interests. This is all hugely important information for Berkshire holders like me as well as potential Berkshire buyers (or sellers).
A ballpark guess is that he sees Berkshire worth roughly 160% of BV.
3. On Packaged Goods Brands
Are packaged goods brands an imperiled business model? Judging by the many articles on dividend and dividend growth investing on this site, Buffett's take on this question may be the single most important nugget from the birthday interview. He doesn't exactly say that these companies are in terminal decline, but a very cautious view about consumer brands is clearly present between the lines.
What kicked off the discussion was Becky Quick's question about potential Berkshire interest in Campbell Soup (CPB). Buffett replied with a quick no, couching his response in polite language centered around the fact that Berkshire already has a huge position in Kraft Heinz (KHC). The essence of his answer, however, was: not-on-your-nelly! So no Campbell Soup acquisition for Berkshire.
Buffett didn't stop there, however. He went on to give a very illuminating explanation of his current opinion on consumer staples companies with packaged goods brands. To grasp the significance of these remarks, it is important to remember that until about the year 2000, these companies were the centerpiece of Berkshire's portfolio. Buffett's success with them, especially Coca-Cola, was a major contributor to his market-beating returns for several decades.
In parsing his comments, it is important to remember that Buffett rarely slams anything directly except derivatives, hedge fund fees, and outrageous executive compensation. He generally holds himself to damning by faint praise, or no praise at all. His carefully measured lack of enthusiasm for a market sector he once loved is damning.
What changed his view?
Buffett's original investing premise, aside from cheap price, was that a great investment was a business with a moat and high return on invested capital - ROIC. It was important, though not always stated, that great businesses have opportunity to make use of their cash flow in ways that maintain that high return on capital. Companies with strong brands used to fit this premise in every regard.
Buffett sometimes noted that companies with strong brands even offered good inflation protection because brands come with pricing power. When they declined during the inflationary 1970s, it was because of the compression of market PE, not because of any operational problems, and consumer staple brands were a great place to be when the great bull market blasted off in 1982. They were the stalwarts of that era.
In his extension of reasons for not buying Campbell Soup, Buffett noted that many companies in the area of packaged good brands had once been wonderful businesses and had outstanding backward looking ROIC. The key words here are "backward looking." In other words, he has doubts about their ability to reinvest cash flow profitably and maintain that high ROIC. Buffett argues in the interview that he has always loved brands, but that in the past 10 years, the business has been getting "tougher," with pressure from retailers and a movement among consumers toward greater willingness to shift. He adds that these stocks are also much more expensive than they were 10 years ago.
In simple language, the business of branded packaged goods is showing damage to its moat and losing the ability to redeploy capital profitably, while their stock prices have been driven to the sky by income seekers. Hedge fund vultures now hover over their managements hoping to squeeze out a last drop by rearranging the pieces via mergers and spinoffs. No part of this development is friendly to individual investors.
Judging by the many articles on dividend and dividend growth investing on this site, this observation by Buffett should be a matter of great interest to SA members. Some of the pieces on dividend stocks, especially in the consumer staples area, seem to me a bit complacent and dismissive of the questions of valuation and the dimming of future prospects. I know the arguments that only the income matters, but I am not persuaded. Dividend investors would do well to take notice of Buffett's view on the questionable three to five year prospects of the branded consumer staples space.
A company's prospects and its price both matter. High return on capital was always a prime criterion for Buffett. He loved a business like Dairy Queen, which could prosper and grow without significant inputs of capital. About fifteen years ago, Buffett began to modify this view. His view of high ROIC became more subtle and complex. I wrote in this article about the way Buffett has transformed Berkshire by changing his focus to businesses which not only generate cash but also are able to reinvest that cash almost automatically in constructive ways.
Buffett still holds both Coca-Cola and Kraft Heinz. Coca-Cola is the brand of all brands - he and Charlie used to ruminate about how much it would cost to replicate its brand from scratch - and the deal structure which brought him Kraft Heinz was too good to turn down. It's important to remember, however, that the tax situation of dividend stocks held inside corporate portfolios (low dividend taxation, heavy loss of capital when taking capital gains taxed as ordinary income) will likely be enough to make him keep them, as I wrote here. Individual investors generally work within a tax structure that is more or less the inverse of the tax structure applied to corporations - more tax on dividend income, less tax on long-term capital gains.
I seriously doubt that Buffett will make an acquisition or major commitment of new money into any company with any resemblance to Coca-Cola or Kraft Heinz. Buffett is an investor with strong underlying principles but also extraordinary flexibility and openness to change. When he changes his opinion, it is worth paying close attention.
Buffett tells you that Apple has great products and great prospects, was a screaming buy two years ago, a pretty darn good buy in the past year, and a solid hold or weak buy at the present.
Buffett tells you indirectly that he will likely buy back Berkshire shares around 140% of book value, providing a "soft floor" for the stock. This information tells you by implication that Berkshire is worth a meaningful amount more than that.
Buffett tells you that what he sees through Berkshire's many businesses is a strong economy with a bit of raw material inflation. He is unsure how much inflation is attributable to tariffs. He approves of Jerome Powell and Fed policies.
Buffett's most important revelation - my view - is that he is no longer interested in consumer staples companies in the branded packaged goods space. He feels they are overpriced and that their businesses are under attack from both margin squeezes by retailers and changing consumer behavior. He uses the modifier "backward-looking" for their apparently excellent return on invested capital. This is a problem for high ROIC businesses which has worried me for some time, and it may be worth another article in the future.
Disclosure: I am/we are long BRK.B.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.