In this podcast, Motley Fool analyst Jason Moser and host Deidre Woollard discuss:
- Why Berkshire Hathaway doesn't pay a dividend.
- If utility businesses are in trouble.
- What a mountain of cash means for the insurance business.
Ken Costa, author of The 100 Trillion Dollar Wealth Transfer, explains how a sea change in wealth could impact the world's financial future.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Feb. 26, 2024.
Deidre Woollard: Settle in, friends. It's Uncle Warren's story time. Motley Fool Money starts now.
Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool Analyst Jason Moser. Jason, how's your Monday going so far?
Jason Moser: Hey, Deidre, going really well. There's beautiful weather here in Northern Virginia. Do you know what I feel like? I feel like maybe spring is just around the corner.
Deidre Woollard: I hope so. Well, over the weekend, Berkshire Hathaway's Annual Report dropped so we've got the task of looking at it. Interesting report. Even if you're not a Berkshire Hathaway investor, take a look at it. You don't have to read the whole 152 pages, the first 16 will do. It was first one without Charlie Munger, beautiful to hear him call Charlie the architect of Berkshire. But he also went back on one of the things he loves to talk about, operating earnings versus net earnings. He calls it net income works than useless. He said it doesn't reflect a company's true status. He shows the operating earnings versus the net earnings. I don't know Jason. He's talked about it for years, he's right but it's not like anybody else is doing the same thing and reporting both, or at least not in a lot of companies.
Jason Moser: No, it definitely feels like it's hit or miss as though as to how companies will view this. I understand that to a degree. Not all companies are the same. There are certain metrics, I think, with certain businesses that can start to make a little bit more sense. I think in the case of Berkshire Hathaway specifically, I do understand his gripes with net income, particularly when you consider the accounting updates that were changed in 2018, I think it was. He pointed this out in the letter, it can ultimately change the capital gains or losses that Berkshire can realize the excess of $5 billion on any given day. A lot of that is because of Berkshire Hathaway, we know it's a business that does a lot of things but one of the things it does and does very well is invests.
They invest a lot of their capital into businesses, and in the value of those businesses that changes day to day just like we witnessed in the stock market. His gripe with net income is that it's not really reflective of the actual business of Berkshire Hathaway. The operating earnings give you a better window into how the actual business itself really is doing. I do understand that perspective. You can argue he's much more focused on the long-term shareholder and I think that's what so many of us like about Berkshire, about Buffett, and about the late Charlie Munger. But it's not one of those things that applies the same to every business but I absolutely understand why he feels so strongly about it in regard to Berkshire Hathaway.
Deidre Woollard: Well, you mentioned the long-term investor, and in this letter, he takes the framework of talking to his sister, Birdie and talking about the reasons why people buy Berkshire. They don't buy Berkshire to cash in on a hot stock. You described it as the same way you might buy a farm or rental property. Thing I'm wondering here is Berkshire, it's sitting on this mountain of cash. How big is this mountain of cash so big that they could really buy most of the S&P 500, not every company, but a lot of them? It gets hard to get your brain around. But he's also said, most of the companies that are worth investing in, there are too pricey. Outside the US he's seeing no candidates for meaningful options for capital deployment. I keep asking, should Berkshire just pay a dividend? I know they're probably not going to in Warren's lifetime, but frame the argument for me there.
Jason Moser: I think you're probably right. It feels like at least we shouldn't expect that for the rest of his lifetime, which is funny because you know he loves owning all of these businesses that paid that company so much in dividends every year. From that perspective, there is a second-order dividend that we get from Berkshire that shareholders in Berkshire Hathaway get just by virtue of the fact that the company owns so many businesses that pay them dividends. But you're right. It's 167 billion, some odd dollars they have on the balance sheet now at this point. The debt that they have on the balance sheet it's just well-structured, staggered out.
That's not a concern. Berkshire is just this amalgamation of just these cash-producing businesses. It feels like a dividend would be in order, even maybe just a special dividend, and then maybe there will be some tax law or something that comes up at prompts them to initiate a special dividend. We've seen that happen before, Costco stands out as a company that not all that long ago. But he clearly loves the businesses that pay them dividends. We just haven't seen them want to take that next step with the direct shareholders. It's that age-old argument.
They do that because they believe that they can put that money to better use. So far it's worked out pretty well for shareholders. It's difficult to argue against that but by the same token, we see this passage in the letter this year, and I'll go ahead and read this because I think it's important, it says, ''With our present mix of businesses, Berkshire should do a bit better than the average American corporation, and more important should also operate with materially less risk of permanent loss of capital. Anything beyond slightly better though, is wishful thinking.'' He's starting to acknowledge that Berkshire is really big. Deploying that capital and finding acceptable and outperforming rates of return is becoming more and more difficult. It feels to me like we're closer to Berkshire offering up a dividend at some point but when they do that is still anyone's guess.
Deidre Woollard: Absolutely. I think it's important that he's he's not promising as eye-popping results, but he is looking to a market-beating around 15% returns. It's not exactly the company is not going to grow at all, it's just not going to do these massive numbers. The other thing I find interesting is that they do buybacks. I was talking to Jim Gillies, our friend, and analyst, and he was pointing out that they've bought back around, I think it was 12% over the last, I think it's about five years. There is that happening and you know with Berkshire, it's not one of those things where you have to worry if a company is buying back at the wrong time, it's Berkshire, they always pick the right time. [laughs] I like to believe so, but do you think maybe we'll see more of the buybacks instead of the dividend?
Jason Moser: I think that really depends on how much longer Buffett is actually in there calling the shots. Berkshire, I think is always going to be Berkshire and that culture is going to remain consistent, for the most part, but at some point, this is going to be a company under new management and under new guidance, and there will likely be some differing perspectives in regard to that. It's nice to see obviously with share repurchases and continued spring share countdown. They did for a long time. I think they held at 1.2 times standard as far as buying back shares. 1.2 times book or lower. It was a valuation perspective where they felt like it represented an opportunity. Then they changed that and said, hey, look, we're just going to use our own guidance.
We feel like we know it when we see it, so therefore, we'll do it and we feel like shareholders will benefit from this. It's really difficult to say, they will continue, I think, to focus on sure-fire ways to return capital light share repurchases, and as long as those share repurchases are bringing that share countdown shareholders can feel really good about that. But dividends, that's cash in the pocket. When you hear talk of dividend kings and Dividend Aristocrats® [the term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.], Berkshire Hathaway is a business that could put itself in that position. Granted to achieve that status, it would take a lot of time because that's what is required but it certainly has the business that is capable of achieving that over time.
Deidre Woollard: Absolutely. Well, one of the things I found really interesting was his talk about utilities. Pretty negative about the future of utilities as investments, saying the final results for the utility industry may be ominous. Certain utilities might no longer attract the savings of American citizens. It sounds to me like he's really seeing a dramatic shift there. Utilities tend to be those steady investments over time but he's saying, based on what we've seen in California, what we're seeing in Hawaii, utilities become increasingly dangerous, it sounds like.
Jason Moser: It seems that way when you have this different way of looking at utilities between the public model and the Co-Op or private model. Maybe when I think about the utility company that I use here, that we use here in Northern Virginia, it's NOVEC. It's a not-for-profit corporation. It's owned and controlled by the members, AKA the customers like us, who actually purchase our energy from NOVEC. He absolutely has seen and expressed some concerns in regard to the space. You mentioned the States, they're things that continue to change in the utility space. Environmental concerns, regulatory concerns, the amount of capital that these utilities are going to require in the coming years. We're seeing this trade-off between that private model versus the public model.
One may not necessarily be better than the other but when you look at this public model that he's pointing to, and see more and more states going this direction, it becomes really more about figuring out how to access that capital and less about profitability. We do see utilities becoming really truly a utility that's becoming more and more difficult for these companies to pass pricing along. Increasing prices for the users doesn't necessarily result in a more profitable business in this case. Given how we are seeing things play out going forward, obviously, a lot of concerns regarding climate change and the way these utilities operate.
Jason Moser: It does feel like these utilities are set up for a much more challenging stretch going forward. I think he's right to note that.
Deidre Woollard: Yeah and it's interesting speaking a little bit about climate change and events. I want to pivot and talk a little bit about the insurance industry because Berkshire's so many things, it's everything from candy to rugs, big investments in Occidental Petroleum, American Express, Apple of course. But the driving engine of the company is insurance. He said that he believes the insurance industry is going to experience what he called a mega catastrophe. Thinking about that mountain of cash again that Berkshire is sitting on, he says, the insurance industry will have this gigantic moment. Doesn't know when it's going to happen, but he says Berkshire will survive, there'll be open the next day. It's an interesting situation to think about insurance. Fine for Berkshire, but does it make you worry a little bit about insurance as a sector in general?
Jason Moser: As a sector may be. Insurance is really hard, I think just the business of insurance is really hard. Figuring out, quantifying that risk, and then projecting it, forecasting it. In writing these profitable books of business, it's just really difficult to do really well over long stretches of time. There are a couple of quotes that come from the letter here that I think just really give us a good view into his mindset. He said, at one point here in the letter, I quote, "extreme fiscal conservatism is a corporate pledge we make to those who have joined us in ownership of Berkshire." That actually could go back to that dividend that we're having a little bit of a go too. He's just not so willing to go ahead and give up that cash out-of-pocket necessarily if he didn't feel like he has too, and right now, shareholders still haven't really demanded it of him, and a lot of that just really I think is due to the performance of the business over long periods of time.
They just had a very good job of managing risk year in and year out with Berkshire. But when you look at insurance itself, insurance is interesting. You get the quality of companies really does run the gamut. Having worked in the insurance industry before, I worked for one of the large reputable companies out there with a big red umbrella. I'll leave it to you to guess which company I'm talking about there, Deidre. But the bottom line was my experience with a lot of those businesses, you would see your reputable players, the big, well-capitalized companies that were thinking longer-term. There were a lot of companies that just didn't belong in that industry and you could tell their lives we're going to be very short because they just weren't writing good books of business, the service wasn't good, the coverage wasn't good, and so I think with insurance you have to be very picky.
You do have to look for those companies that just have long demonstrated track records of performance. When you look at Berkshire Hathaway, again, he pointed this out in the letter, the property and casualty insurance side of the business, this has just been something they have done so well for so long. They've been in the business for 57 years and talked about a 5,000-fold increase in volume from $17 million to $83 billion, and they still believe they have a lot of room to grow. I think that confidence stems from the fact that they've been so cautious, so particular about the books of business they've written all along the way. When you had that level of expertise, 57 years, that really does go a long way in this line of work.
Deidre Woollard: Yeah, good. Good underwriting goes a long way. Well, I want to finish up with talking about another company that seems to have no trouble paying a dividend. Domino's Pizza reported today, solid results, nice increase in same-store sales, 25% increase in the quarterly dividend to $1.51 a share. Also $1 billion share repurchase program. Interesting because there's a concerning amount of debt with this company but they're really making this move and I'm seeing this shift toward dividends in general. But what do you think this one?
Jason Moser: Well, I do think when you look at Domino's, they ran a good market, pizza is pretty darn reliable. They don't make the best pizza in the world, but you know what, they make good food, and they make good food that a lot of people want to buy and the numbers bear that out. I think when you look at Domino's most of the debt that they have, it's in the form of low-rate notes that are staggered out very well over the course of time, all the way up to 2031 so the debt, while it may look like a large amount, it really isn't when you actually look at how it staggered out, the coverage ratio, which looks at operating income over net interest expense, it's right there, four-and-a-half times, which is very acceptable level for a company like this, the payout ratio is consistently in that 25-35 percent range.
So they aren't really overstepping their bounds on the dividends that they're paying, the net income that the company generates can really fund that dividend OK. Then the repurchases, the share count is continuing to come down. When you look at how the business is performing, the total return for this business has outperformed the market over the last five and 10-year horizons. I think in the case of Domino's, they've done a very good job of managing their capital position and balance sheet very well, making sure to return value to shareholders with both repurchases and dividends. It's nice to see them raise that dividend because I suspect that'll keep a lot of people on board.
Deidre Woollard: Yeah. I think that's true. Well, thanks for your time today, Jason.
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Deidre Woollard: We talk about a lot of stocks on the show, but it's just a peek at the Motley Fool's investing universe. This year we're rolling out a new offering, it's called Epic Bundle. Service includes seven stock recommendations every month, model portfolios, and stock rankings, all based on your Investor type. We're offering Epic bundle to Motley Fool Money listeners at a reduced rate as a thanks for listening to the show. For more information had to fool.com/epic. We'll also include a link in the show notes for you. Over the next decade, it's estimated that trillions of dollars will pass from baby boomers to millennials. What does this type of generational shift mean for the future of investing? Ken Costa author of The 100 Trillion Dollar Wealth Transfer explains what this could look like.
Let's start with the title of the book, I've been calling it The great wealth transfer, but you put a dollar figure on it, a big dollar figure with 100 trillion. Why that number and how is the wealth transferring?
Ken Costa: It's 100 trillion, 64 trillion over in the US and the rest in Europe and the rest of the world. The way in which it's transferring is people think, oh, well maybe that's just in a very long time in the distance future. No, it's happening now because the bank of mom and dad and the bank of grandpa and grandma, are already helping the next generation putting down deposits for homes, being able to help with escalating rent everywhere in the world cities, and also helping on the college account so we're already seeing that happening. In addition to that, it continues to grow as this whole period of the disposable income has increased in an era of low-interest rates. Assets have gone up and so people are making gifts of shares and bonds to that next generation. It's growing and it's just going to continue until we see this huge amount transfer.
Deidre Woollard: Well, it's fascinating because we have people living longer and I think younger people feel like they have more time to even into their financial life. They're staying at home longer. It's an interesting time period that seems a little different than other wealth transfers.
Ken Costa: Well, it's interesting firstly, because a generation is living longer, the healthcare is better. But equally, a next generation are becoming very much more savvy than a previous one because they have access to a large number of tools that give them an understanding of investment and how to invest. However, a taboo subjects still exists between discussing succession openly and discussing money openly. But what is important is that the two generations are able to talk together. Because if they don't, we will have a conflict of generations rather than the cooperation of generations, which is what I am most concerned about.
Deidre Woollard: I'm a little concerned about that too. Also, the other criticism I've heard at the wealth transfer is that it's going to accelerate the current financial inequalities of the world because it's going to concentrate wealth. Wealth goes to wealth, is that something you're also looking at?
Ken Costa: Well, worldwide, there will be an increase in the wealth that this generation has achieved and its assets, but it is transferring. Yes, it will transfer to the next-generation, which may be thought to be in that wealthy bracket. However, the fact of the matter is this next generation has got some very clear ideas as to how it wishes to see that wealth spread in terms of having the financial capacity and the power to influence climate change, environment, justice, inequality, which are very important values to the generation.
I'll just add this, that one of the important things to look in a generation dies and then the money goes to the next generation, that happens normally. But there are three very important distinctions at the same time, not only is finance moving, but power is moving as well. The next-generation are empowered by technology as never before, and the speed of change of technology which they've embraced and which has gone to enable them to change the very ways in which we are living together, whether it's artificial intelligence or quantum computing. The power going to them in terms of social media where not only the social media at their fingertips, but able to influence even major corporations in the directions in which they want to go. When you add that to the agenda that they have, you see a situation that could easily become explosive.
Deidre Woollard: But one of the things you say in the book that I think contributes to that is by 2030, all baby boomers will be at least 65-years-old. At the same time, millennials are gonna make up 75 percent of the workforce. You've got these two massive populations going through this big life transition, and you've got those millennials taking power. What does that set us up for?
Ken Costa: Well, that sets us up for either the clash of a generation or for the cooperation. The way I put it is this, we need the hindsight's of the boomer generation. We need the insight of the next generation who are seeing the shape of the world very differently from a previous generation, which would create a full sight to be able to anticipate the social, political, and financial changes that are coming. In the book I speak about being the answer to this divide, we know about co-investing, co-living but the big philosophical change is co-destiny.
Two generations working together to be able to know that we all have to live well on this planet. But equally that millennial or as I call them the zennials, the millennials and the Gen Zs, they will be in positions of very real influence. I would add this, it is interesting that the view always was, and it was attributed to Churchill, I'm not sure that was accurately attributed, that if you're notice socialist when you're 20, you have no heart. If you are a socialist when you're 40, you have no head. But I think that what is changing is that the zennial generation, led by the millennials have maintained their concern for society, for prosperity, yes, but also for purpose. They want to do good and do well at the same time. I think that there is a major shift that they have maintained rather than as a previous generation would have looked at financial reward is being the most important test.
Deidre Woollard: As an investor, I'm always trying to figure out where the money is going, where consumers are spending. Given this wealth transfer, what are you looking at in terms of how people spend? Are the same luxury brands still in play? What is the younger-generation value in terms of how they spend?
Ken Costa: I think they look to authentic branding where they can trust the brand. An example would be Lululemon in its athletic wear. If one can mention a company, they've built up a reputation that the generation has trusted, that they think the values are good, whether that's true or not I can't comment, but that's one of the growth. They know it's reliable and it's authentic. I think authenticity in the brands is going to be a significant development for the generation as well. We will see increasingly that coexistence, I want to know the provenance of where something has come from. There's slightly change to that, which is how can you support the communities in which or from which you have got your latest whatever luxury branded might be. Yes, in a curious way they're still brand-conscious, but more discriminating about the brand and its provenance.
Deidre Woollard: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
