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According to Warren Buffett, the first rule of investing is not to lose money. But his investment vehicle, Berkshire Hathaway (NYSE:BRK.B), just recorded a $3.8bn write-down in the value of one of its investments.
It’s fair to say the company’s investment in Kraft Heinz hasn’t been one of its most successful ventures. But – as usual – Buffett’s one step ahead.
Kraft Heinz
In its Q2 earnings update, Berkshire registered that $3.8bn write-down in value and, as a result, the firm reported a decline in net income compared to the previous year.
The write-down reflects a combination of the change in the Kraft Heinz share price and the firm’s financial outlook. But unless something happens in the future, the impairment’s permanent. Kraft Heinz is undergoing a strategic review, which might involve separating its condiment unit from its grocery division. This is rarely a sign of a business that’s firing on all cylinders.
Berkshire has also relinquished its seats on the company’s board, which also isn’t a good sign. But despite all of this, Buffett’s investment hasn’t exactly been a disaster.
Investment structure
His investment in the business isn’t the kind of deal ordinary retail investors can do. As part of its initial investment, Berkshire received $4.25bn in preferred shares with a 9% dividend yield. These returned $1.3bn in cash before being redeemed (for $4.25bn) in 2015. That means Berkshire got over half of its initial investment back from this alone.
In addition, the common shares Buffett’s company acquired have distributed $6.3bn in dividends and the remaining stake has a market value of $8.8bn. That implies a total gain of over 100%.
The overall return is decent, but the key is the structure of the deal. Getting over half of the initial stake back via preferred shares and dividends greatly reduces the chances of losing money.
Berkshire Hathaway
Berkshire Hathaway’s huge cash reserves can be a drag on growth when things are going well. But it puts the firm in a position to take advantage when unusually good opportunities arise.
The chance ot make an investment like Buffett’s one in Kraft Heinz isn’t something that comes around very often. And it also isn’t available to most investors.
It’s only possible for companies with unusual financial strength – such as Berkshire Hathaway. And as I see it, that’s a huge part of what investing’s about.
When I invest, I look for businesses that have opportunities to generate better returns than I can manage by myself. That’s why Berkshire Hathaway’s my largest stock investment.
A buying opportunity?
Since Buffett announced his retirement, Berkshire Hathaway shares have fallen around 10%. And that makes sense – the firm’s losing an uncommonly skilled CEO.
I think however, that one of Berkshire’s other key assets – its balance sheet – is still firmly intact. So I expect it to be in a strong position to take advantage of opportunities for some time.
I’m looking to buy the shares at a price-to-book (P/B) ratio of around 1.5. The stock’s a little above that at the moment, but I’m getting ready as it gets closer to that level.
