Where Buffett’s Putting Berkshire’s Money

The quick and easy headline out of Berkshire Hathaway’s (BRK.B) second quarter 13-F filing is that it built new stakes in Suncor (SU) and Dish Network (DISH). The Dish position is nothing more than a rounding error, amounting to $23 million, or 0.03% of the $89 billion investment portfolio. The $524 million value for the new Suncor position, is still just 0.60% of Berkshire’s portfolio.

In fact, while Berkshire Hathaway revealed in its quarterly financial disclosure that it increased its equity portfolio by $4.7 billion in the second quarter, toting up the value of second quarter purchases (an estimate based on average share prices during the quarter) adds up to around $2.5 billion. That raises the possibility that there is a larger new position being built -- but not yet disclosed.

In pure dollar terms the highest conviction move in the second quarter was U.S. Bancorp (USB), which now represents 3.2% of Berkshire’s portfolio. Berkshire Hathaway increased its shares in U.S. Bancorp from 61.5 million shares at the end of March to 78.3 million at the end of June. Using the stock’s $34.31 average share price during the quarter that looks to be an additional $576 million or so investment, more than the end-quarter value of the new Suncor position. Still, even $576 million isn’t a dive into the deep end of the pool, as it represents less than 1% of the $89 billion portfolio.

USB Return on Assets Chart

USB Return on Assets data by YCharts

In earlier YCharts posts, we’ve hammered away at our belief that plain-vanilla banking, as practiced by U.S. Bancorp, is not only a safer investment but one with higher return over time, as seen in a return-on-assets charts comparing the bank’s performance to JPMorgan (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC), the latter of which is also a plain-vanilla adherent.

Buffett also added a smidge (1%) to his Wells Fargo stake, which now lords over the portfolio at 21.5% of assets at the end of the quarter. Wells Fargo was the only stock among Berkshire’s Big Four that was touched in the quarter. Coca-Cola (KO) and American Express (AXP) haven’t been traded for eons; at the end of the second quarter they accounted for 18% and 12.7% of the portfolio respectively.

The last of the Big Four, International Business Machines (IBM) was also untouched in the second quarter. That’s the first time since Buffett built the large stake throughout 2011 that he hasn’t added to the stake. While most of the buying occurred in 2011, there have been tiny additions since. The IBM stake accounted for 14.8% of the investment portfolio at the end of the second quarter, a year ago it was close to 19% of the portfolio.

IBM has badly lagged the S&P 500 for the past 12 months, and in the second quarter the stock price slid 10% as revenue growth stalled.

IBM Chart

IBM data by YCharts

But for Buffett’s purposes, IBM isn’t a disappointment. He’s been clear that one of its chief attributes is an ability to increase shareholder value through stock buybacks, which is more economical when a stock price is lower. Buffett explained why he was rooting for IBM stock to swoon in Berkshire’s 2011 shareholder letter.

Even though revenue has softened, IBM’s earnings per share have continued to rise, a function of cost-cutting, but also repurchases.

IBM Average Diluted Shrs Outs Annual Chart

IBM Average Diluted Shrs Outs Annual data by YCharts

Buffett is on the record dismissing bonds as a terrible investment right now. One way to look at IBM is as a bond-like holding without the problems of a fixed payout. IBM’s dividend has nearly doubled over the past five years, yet the current payout ratio is still below 25%.

IBM Dividend Chart

IBM Dividend data by YCharts

The current dividend yield is just 2%. Add in the impact of those share repurchases and the stock’s net payout yield is close to 8%. Try getting that in a high quality bond. Since mid 2011, even a weak IBM has delivered more than the high grade iShares Barclays Core Total Bond Market ETF (AGG).

AGG Total Return Price Chart

AGG Total Return Price data by YCharts

Based on the quarterly filing, Berkshire didn’t add to its 2.6% position in dialysis provider DaVita Healthcare (DVA), marking the first time since the position was established in the fourth quarter of 2011 that there wasn’t a share increase. Watching the PE ratio expand over 30 during the quarter probably certainly didn’t scream for more purchases.

DVA Chart

DVA data by YCharts

But in classic Berkshire fashion (this stock is the handiwork of Ted Wechsler, not Buffett) the DaVita position was added to in early July as the stock was getting hammered on concerns of reduced Medicare payments for dialysis treatment. In a separate filing Berkshire revealed it increased its DaVita share count by 4% on July 2 and July 3; a juncture when the stock was selling for 13% less than its May peak.

Among the other additions in the second quarter, General Motors (GM) was the only one of note; as a 40% share increase brought the stake to 1.5% of Berkshire’s investment portfolio. Additions to holdings in Bank of New York (BK), National Oilwell Varco (NOV), VeriSign (VRSN) and Chicago Bridge & Iron Co. (CBI) still left each position below 1% of portfolio assets.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.



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